If you own a business and April keeps sneaking up with a tax bill you did not plan for, you are not bad with money. You just never got a simple system for setting cash aside. The good news is that the math is more predictable than it feels, and once you know your numbers you can stop dreading tax season.
This post gives you the real percentages, the actual deadlines, and a two-account system you can set up this week. It was written by a tax pro who trained at KPMG (one of the four largest accounting firms in the world), so the numbers here are the same ones I use with East Valley owners every day.
The Three Taxes You Actually Owe
When you work for yourself, your tax bill is really three bills stacked on top of each other. Knowing the three parts is the first step to not being surprised by the total.
Self-employment tax
Self-employment tax is Social Security and Medicare for people who work for themselves. When you have a regular job, your employer pays half of this for you. When you own the business, you pay both halves. The rate is 15.3 percent of most of your profit (your income after business expenses). This one catches new owners off guard because it comes before any income tax at all.
Federal income tax
On top of self-employment tax, you owe federal income tax. This one rises as you earn more, in steps the IRS calls brackets. A lower-earning owner might sit in the 10 or 12 percent range, while a higher-earning one moves into 22 or 24 percent on the top part of their income. You do not pay the top rate on every dollar, only on the dollars inside each bracket.
Arizona state income tax
Here is some good news for living in the East Valley. Arizona charges a flat 2.5 percent state income tax, which is one of the lowest in the country. Flat means everyone pays the same rate no matter what they earn. A Gilbert salon owner and a Mesa contractor both pay 2.5 percent to the state.
The Simple Set-Aside Percentages
You do not need to model brackets by hand. Here is the rule of thumb I give owners, based on expected yearly profit:
- Under about $50,000 of profit, set aside roughly 25 percent.
- Up to about $100,000, set aside roughly 30 percent.
- Above that, set aside roughly 35 percent.
Say you run an online store in Queen Creek and you expect $80,000 in profit this year. At 30 percent, you would set aside $24,000 across the year for taxes. Spread over 12 months, that is $2,000 a month moved into savings. It feels like a lot until you remember it was never really your money to spend.
Quarterly Estimated Payments Without the Panic
The IRS does not want to wait until April. If you owe more than a small amount, you are expected to pay in four chunks during the year, called estimated payments. The deadlines are April 15, June 15, September 15, and January 15. You can pay online in a couple of minutes at IRS Direct Pay, and Arizona has its own online portal called AZTaxes for the state share.
There is a rule that protects you called safe harbor. If you pay in at least 100 percent of last year's total tax (110 percent if you are a higher earner), you avoid the underpayment penalty even if you end up owing more when you file. That takes the guesswork out. You just match last year and settle the rest in April.
If you skip quarterly payments entirely, the penalty is basically interest on what you should have paid, running around 8 percent a year in recent years. On a $24,000 bill, skipping the whole year could cost a few hundred dollars in penalty plus the stress of one giant April payment. Paying quarterly is almost always the calmer, cheaper path.
The Two-Account System That Makes It Automatic
This is the part that changes everything, and it takes about ten minutes to set up.
- Open a separate savings account at your bank, labeled Taxes. Most banks let you open one online for free.
- Every time you pay yourself (take a draw) or close out a month, move your percentage into that account right away. Made $6,000 profit this month and your rate is 30 percent? Move $1,800 the same day.
- When a quarterly deadline comes, the cash is already sitting there waiting. You pay it and move on.
When an S Corp Election Starts Saving You Money
Once your business is consistently profitable, there is a tax move worth knowing about. An S corp election lets you split your profit into two parts, a reasonable salary and the rest as distributions. You still pay the 15.3 percent self-employment-style tax on the salary, but not on the distributions. That can trim your tax bill nicely.
The rough threshold is consistent profit above about $50,000 to $60,000 a year. Below that, the savings usually get eaten up by the added costs, running real payroll for yourself and filing a separate business tax return. Above it, the math often works in your favor. It is worth running the numbers with someone before you elect, because doing it too early can cost more than it saves.
The Yearlong Discipline Behind a Calm April
Notice that every percentage in this post depends on one thing: knowing your real monthly profit. If your books are messy or you are guessing at expenses, your set-aside will be wrong and April will still bite. Accurate taxes start with accurate bookkeeping, kept up every single month. If you want the full monthly rhythm, our guide on a simple monthly bookkeeping routine walks through it, and if your bank and business money are still tangled together, start with separating business and personal finances first.
Here is the honest part. Doing all of this right, every month, takes time, discipline, and a bit of know-how that most owners would rather spend on their actual business. That is exactly what we do at GGS. Erick trained in tax at KPMG and now keeps East Valley owners tax-ready all year at small business prices, so your set-aside is accurate, your quarterly payments go out on time, and April is just another month. You can text a person, not a ticket, whenever a question comes up. If you would rather stop guessing, take a look at our done-for-you bookkeeping and CFO services or book a call below.
The short version
- You owe three taxes as a business owner: self-employment tax at 15.3 percent of profit, federal income tax that rises with income, and Arizona's flat 2.5 percent state tax.
- A quick rule of thumb: set aside about 25 percent of profit under $50,000, 30 percent up to $100,000, and 35 percent above that, and always calculate from profit, not revenue.
- Pay the IRS in four quarterly installments (April 15, June 15, September 15, January 15), and use the safe harbor rule (pay 100 to 110 percent of last year's tax) to avoid penalties.
- Open a separate tax savings account and move your percentage the moment you get paid, then never borrow from it.
- Once profit is consistently above about $50,000 to $60,000, an S corp election can trim self-employment tax, but the added costs make it a poor fit below that line.
Questions owners ask us
Do I set aside taxes from my revenue or my profit?
What happens if I skip my quarterly estimated payments?
Is Arizona's income tax really that low?
When should I consider becoming an S corp?
Make This April Boring
Let GGS keep your books accurate and your tax set-asides right all year, so you always know your number and never get surprised again.