How much should a small business set aside for tax?
A simple rule of thumb, the exceptions that matter and how to stop tax bills from becoming cash-flow emergencies.
The most common question we hear from new clients is also the most important: how much of every sale should I keep back for tax? For most profitable small businesses, setting aside 25 to 30 percent of profit, not revenue, is a sensible starting point.
Open a separate tax account
Move your set-aside into a separate savings account every week or month. Money you cannot see is money you will not spend by accident.
What changes the number
- Sales tax you collect is never yours: keep all of it aside.
- Large equipment purchases can reduce the tax you owe this year.
- Retirement contributions often lower the bill for owners.
- A fast-growing business may need to pay tax in advance.
A quarterly tax projection turns this rule of thumb into an exact number, so there is never a surprise bill.