How Much Should I Set Aside for Taxes on 1099 Income?

Ask this question in any freelancer forum and you will get the same answer within a minute: set aside 25 to 30 percent.

That answer is not wrong, exactly. It is a reasonable starting point for a lot of people. But it skips the two things that determine whether you end up fine in April or short by five figures. The first is what you apply the percentage to. The second is what the percentage is actually made of, which is the only way to know whether yours should be higher or lower.

Both matter more than the number itself, so start there.

This is the single most expensive misunderstanding in self-employment taxes, and it cuts both directions.

You are not taxed on money that lands in your account. You are taxed on what remains after legitimate business expenses. Two people can deposit identical amounts and owe wildly different tax.

A consultant. She bills $140,000 over the year. Of that, $38,000 goes to subcontractors she brings in for larger builds, and another $16,000 covers software, hosting, insurance, and her home office. Her profit is closer to $86,000. Setting aside 30 percent of every deposit would have her holding $42,000 against a bill built on $86,000 of profit. She would spend the year cash-starved for no reason.

A real estate agent. He closes $190,000 in gross commissions. After his brokerage split, desk fees, E&O insurance, MLS and association dues, marketing, photography, staging, and a serious amount of mileage, his profit is around $96,000. If he had been setting aside based on gross commissions, he would either be dramatically over-saving or, more commonly, ignoring the whole exercise because the numbers felt impossible.

Worth checking on the real estate side: depending on your brokerage, the 1099 you receive may report gross commissions before the split or only your share after it. Those are very different starting numbers, and you should know which one you are getting before you build anything on it.

The practical version: apply your percentage to profit, not to deposits. Which means you need to know your profit, which means the books have to be current. That is not a sales pitch, it is just the mechanism. You cannot set aside a percentage of a number nobody has calculated.

Three separate things stack up, and they behave differently.

Self-employment tax. This is the big one people underestimate, because employees never see it. It runs 15.3 percent, covering Social Security and Medicare, applied to roughly 92.35 percent of your net earnings. The Social Security portion applies up to an annual cap that adjusts each year, and the Medicare portion has no cap. Half of what you pay is deductible against your income tax.

For most self-employed people earning under six figures, this is larger than their federal income tax bill. Any estimate built only on income tax brackets will be badly short.

Federal income tax. This depends on your total taxable income, your filing status, your deductions, and any other household income. Two freelancers with identical profit can owe very different amounts because one is married to someone with a W-2 job and the other is not. There may also be a deduction available on qualified business income that meaningfully reduces the bill, which is a question for your tax preparer rather than a forum.

State and county. In Indiana this is two layers, not one. There is a flat state rate, 2.95 percent for 2026, and on top of it every one of the 92 counties levies its own income tax, based on where you lived or worked at the start of the year. County rates vary considerably. In some counties the county piece adds a meaningful fraction on top of the state rate, and it is the part out-of-state advice never mentions.

Add the three together and you can see why 25 to 30 percent of profit is a defensible starting point for a lot of people, and also why it is only a starting point.

If you do not know your year-to-date profit right now, the percentage question is unanswerable. Book a free call and we will help you find the number.

A spouse with a W-2 job. This changes everything, in either direction. Extra withholding from a spouse's paycheck can cover a chunk of your liability, which lowers what you need to set aside. It can also push your household into a higher bracket, which raises the rate on your profit. You cannot answer this question by looking only at your own business.

Your entity type. Sole proprietors, single-member LLCs, and S-corporation owners handle this differently. If you have elected S-corp treatment and pay yourself through payroll, some of your tax is already being withheld, and setting aside another 30 percent on top would be double counting.

How good your records are. This one is unglamorous and it is worth real money. Every deduction you fail to capture raises your taxable profit and therefore your bill. Mileage is the classic one for agents, where a year of untracked driving can be a substantial deduction that simply evaporates. Software and subscription charges are the equivalent for consultants and developers.

Whether your income is growing. If this year is much bigger than last year, a percentage that worked before will leave you short, because the extra profit may be taxed at a higher marginal rate than your average.

A few things behave differently when you earn on closings rather than invoices.

The lumps are seasonal, not random. Spring and summer closings dominate, and a strong quarter can distort your sense of the year. The tax on a big June closing is not optional just because November is quiet.

Set aside at closing, not at month end. When a commission check clears, move the tax portion immediately. This matters more for commission earners than for anyone else, because the checks are large and the gap between receiving one and needing another can be long.

Your deductions are unusually large relative to gross. Splits, fees, dues, marketing, and mileage take a serious bite. This is precisely why applying a percentage to gross commissions produces a nonsense number, and why agents who do it either panic or give up.

Track mileage all year or lose it. There is no reconstructing it in April in any way that would survive scrutiny. Use an app, log it as you go, and treat it as a real part of your bookkeeping rather than an afterthought.

The percentage matters less than the habit.

Open a separate savings account used for nothing else. On the day each payment or commission clears, move the tax portion into it. Not at month end, not when you get around to it. The same day.

Money you never treated as spendable does not get spent. That is the entire trick, and it works better than any amount of discipline applied to a single account.

Then revisit the percentage quarterly rather than once a year. If your books are current, this takes about fifteen minutes: look at your year-to-date profit, compare it to what you have set aside, and adjust. Doing it four times a year means small corrections instead of one large unpleasant discovery.

For a lot of self-employed people in Indiana, 25 to 30 percent of profit is a reasonable place to start, leaning toward the higher end if you have no other household withholding and toward the lower end if a spouse's job is covering part of the load.

But treat that as a placeholder until someone runs your actual numbers. The range is wide enough that being at the wrong end of it costs thousands, and the variables that determine your spot in the range are specific to you. We are bookkeepers, so our part is making sure the profit number is right and the deductions are all captured. Which percentage applies to you is a conversation with a tax professional, and it is a short conversation when the books are clean.

We are Allen & Guthrie, Hunter and Jordan, two people who handle bookkeeping for independent professionals and small service businesses, including consultants, developers, creatives, and agents.

We keep books reconciled and current so you always know your profit, which is the number every one of these decisions depends on. You can see what we do and what it costs on our site, because you should not have to sit through a sales call to find out our pricing.

If you have been guessing at this percentage, book a free 30-minute call. Bring your last bank statement. We will show you what your actual profit looks like and what that means for what you should be holding back.

Book your free 30-minute call

Allen & Guthrie provides bookkeeping services and does not provide tax or legal advice. Tax rates, thresholds, and deductions depend on your entity type and circumstances, and they change. Confirm your specific situation with a qualified tax professional.