Set aside about 25% to 30% of every payment you take in as profit. For most self-employed tradespeople that covers your federal income tax and your self-employment tax with a little room to spare. Work in a state with income tax and you should lean toward 30%. Work in a state with no income tax (Texas, Florida, and seven others) and you can usually sit closer to 25%.
That is a rule of thumb, not a promise. The exact number depends on how much you make and where you work, and you can get it to the dollar with our Tax Set-Aside Calculator. But if you take one thing from this page, take this: open a separate account, move a quarter to a third of every check into it the day it lands, and do not touch it. That one habit is the difference between a quiet April and a very bad week.
Why it is more than you'd think
When you are self-employed you pay two separate taxes on your profit, and it is the second one that catches first-year contractors out.
- Federal income tax. The same brackets everyone pays (10%, 12%, 22%, and up), charged on your taxable income after deductions.
- Self-employment tax. This is Social Security and Medicare. When you had an employer, they quietly paid half of it for you. On your own you pay both halves: 15.3% total (12.4% Social Security on the first $184,500 you earn in 2026, plus 2.9% Medicare with no cap). That sits on top of your income tax.
The self-employment tax is the surprise. It is charged on 92.35% of your net profit and worked out on Schedule SE. The one piece of good news: you deduct half of it from your income before your income tax is calculated.
A worked example: $80,000 profit, single filer, no state income tax
Say you cleared $80,000 in profit after expenses. That is your take, not your gross billings.
- Self-employment tax: $80,000 x 92.35% x 15.3% = $11,304
- Federal income tax (after the standard deduction and the 20% Qualified Business Income deduction the trades qualify for): about $5,344
- Total federal set-aside: about $16,648, which is 20.8% of your profit.
Add a typical state income tax and you land around 25%. That is where "set aside 25 to 30%" comes from. Earn more and a bigger slice falls into the higher brackets, so the percentage climbs. Earn less and it drops.
You pay it four times a year, not once
Here is the other job your old employer used to do: pay the tax in as the year goes. On your own, the IRS expects estimated payments four times a year on Form 1040-ES. For 2026 the due dates are:
- 15 April 2026
- 15 June 2026
- 15 September 2026
- 15 January 2027
First, check whether any of this applies to you. The IRS only expects estimated payments if you expect to owe $1,000 or more in tax for the year, after withholding and credits. A few hundred dollars of tax on a handful of side jobs does not put you on the quarterly schedule at all. And if you also hold a W-2 job, you can often cover a small self-employed profit by raising the withholding on that job instead of filing 1040-ES, because withholding counts as paid evenly through the year no matter when it actually happened. The full mechanics of paying, and what to do when your income is lumpy rather than even, are in When do I pay my taxes if I'm self-employed?.
Miss them and you can be charged an underpayment penalty even if you pay in full when you file, because the penalty is worked out quarter by quarter. To stay clear of it, pay in at least 90% of what you will owe this year, or 100% of last year's tax (110% if your income last year was over $150,000). Hit either of those "safe harbors" and no penalty applies.
What brings the number down
Every dollar of legitimate business expense you put on Schedule C is a dollar you are not taxed on. Tools, materials, your work truck (72.5 cents a mile to 30 June 2026 and 76 cents from 1 July, or actual running costs), insurance, your phone, and the rest all come off before profit. The trades also get the Qualified Business Income deduction, which takes 20% off your qualifying business income before income tax is figured. What you can actually put on Schedule C, line by line, is in What can I write off as a self-employed contractor?.
There is one more lever, and it is structural rather than a deduction. Look again at the worked example: of the $16,648 owed on $80,000 of profit, $11,304 of it is self-employment tax, not income tax. That is the bigger half, and it is the half your business structure can change. A sole proprietor pays self-employment tax on all of the profit. An S-corp owner pays payroll tax only on the reasonable salary they take, with the remainder drawn as a distribution that is not subject to it. It is not free money: an S-corp means payroll, a separate return, and real running costs, so it only starts making sense once profit is comfortably into five figures, which is exactly where this example sits. Whether it is worth it for you is in Should I switch my construction business to an S-corp?, and the wider choice between sole prop, LLC and S-corp is in Sole prop, LLC, or S-corp: which should you be?. Keep clean records and the tax on your real profit is lower than the sticker rate on your gross.
Common questions
Do I set aside tax on my whole invoice or just my profit?
Just your profit, not your gross billings. You are taxed on what is left after your expenses, so the quarter to a third goes on your profit. Money that passed through you for materials or subs you paid is not taxed as your income, as long as you deducted it.
Where should I keep the money I set aside?
In a separate bank account you do not touch, moved the day each payment lands. Mixing tax money with your spending account is how it quietly disappears before April. A plain second checking or savings account is enough, and seeing it sit there also stops you spending it.
Does the 25 to 30% include my state taxes?
Mostly it is your federal set-aside; state income tax sits on top and varies. In a state with income tax, lean toward 30%. In a state with no income tax, you can usually sit closer to 25%. Check Working in Your State for your state's rate before you settle on a number.
Do I still set money aside if I only did a few side jobs?
Yes. If it is real work for profit, you owe tax on it, and self-employment tax kicks in once your net earnings hit $400 or more for the year. Set aside from the first job so a small side income does not turn into a surprise bill.
What if I did not set anything aside this year?
File on time anyway and pay what you can, because not filing costs far more in penalties than not paying. The IRS offers payment plans you can set up yourself, and which one you qualify for depends on how much you owe and how fast you can clear it: I owe the IRS and can't pay. What do I do? walks through the options and the order to try them in. Then start the separate-account habit now so next April is not a repeat.
The honest bit
- These are 2026 federal figures. The standard deduction, the Social Security wage base, and the bracket edges change every year. Check the current numbers at irs.gov before you rely on them.
- State tax sits on top and varies a lot. See Working in Your State for your state's income and sales tax.
- This is general guidance, not tax advice for your situation. For anything with real money riding on it, run it past a CPA.
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Templates you might need
Sources
- IRS - Self-Employment Tax (Social Security and Medicare Taxes) · The 15.3% self-employment tax rate and the deductible employer-equivalent portion
- IRS - Estimated Taxes · The safe-harbor thresholds that avoid an underpayment penalty
- IRS Topic no. 751 - Social Security and Medicare withholding rates · The Social Security wage base, verbatim: "Only the Social Security tax has a wage base limit. The wage base limit is the maximum wage that's subject to the tax for that year. For earnings in 2026, this base limit is $184,500." Read 2026-09-05, page last reviewed 20-Jan-2026.
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