How Much Money You Should Set Aside for Taxes in 2024

You've taken the step towards working as an independent contractor, or you've decided to start your own business. Congrats! Being an independent worker can be be very fulfilling and exciting. However, one big question is probably bouncing around in your mind—how much money should I set aside for taxes?

Taxes, as we all know, can be quite a headache. However, by setting aside some of your earnings now, you'll find yourself in a better position come tax time. So, if you are looking for a general idea of what you should be setting aside, this article will give you useful information to help you determine how much.

How Am I Taxed as an Independent Worker or Small Business Owner?

In the U.S., there are three main taxes to be aware of when self employed. Those are: self-employment tax, federal income tax, and state income tax.

Self-Employment Tax

The self-employment tax is a Social Security and Medicare tax that applies your income as an independent contractor. The amount of money you pay in self-employment taxes depends on how much business income you have in a given year. The tax rates are 12.4% for Social Security and 2.9% for Medicare, which brings the total to 15.3%.

Federal Income Tax

Federal income tax is a tax on the income you earn in a year. Income includes all the money you earn through work before any deductions or exemptions are taken out. This includes wages, tips, commissions, bonuses, alimony and child support payments made to you by another person or entity. It also includes disability benefits and unemployment compensation from the government.

The amount of federal income tax that you pay depends on how much money you make during the year and what type of deductions or exemptions are available for your situation.

2023 Federal Income Tax Brackets

Single:

Married:

State Income Tax

State income taxes are a way for states to collect money from the people who live there. The amount of tax depends on how much money you make and where you live. This is in addition to the federal income tax. Some states do not charge you a state income tax while some do.

These taxes range from 0% up to 11% and can be easily found on your state's Department of Revenue website.

So, How Much Do I Owe?

Now that we've covered the main taxes that you owe, it still may be confusing having to add up all these different taxes in the right way. Plus, there may be additional taxes you owe based on your line of work. Sales tax, if you're a retailer, for example. The next section will give you a solid number to aim for when setting aside your money for taxes.

Use the 35% Rule to Set Aside Money for Taxes

You should use the 35% rule to save for taxes as an independent contractor or small business owner because it allows you to set aside a portion of your income each month, so that you're not caught off-guard when tax season rolls around.

The 35% rule is simple: every month, set aside 35% of your income and put it in a savings account. You can use this money to pay your taxes when they come due. The money will be there when you need it, and you won't have to worry about getting hit with an unexpected bill at the end of the year.

Use Tax Deductions to Lower Taxes Owed

Tax deductions are when you get to subtract the amount of money that you paid in taxes from your taxable income. The most common tax deduction is the standard deduction, which is a set amount of money that everyone gets to subtract from their taxable income. Another type of tax deduction is an itemized deduction.

The Standard Deduction

The standard tax deduction is a number that the IRS allows you to subtract from your annual income when filing taxes. This deduction is based on your age, income level, and several other factors. The standard deduction was introduced as a way for taxpayers to reduce the amount of money they have to pay in taxes each year. The standard tax deduction should be used if it is more advantageous than itemizing deductions.

Itemized Deductions

Itemized tax deductions are the expenses that you can deduct from your taxable income if you choose to do so. They're different from the standard deduction, which is the amount of money the government allows you to deduct from your gross income before calculating your tax liability.

Itemized tax deductions are typically more advantageous than the standard deduction. Why? Because they allow you to deduct things like medical expenses, charitable contributions, and mortgage interest—expenses that may not be deductible with a standard deduction.

Considerations When Choosing Between Standard and Itemized Deductions

• Record-Keeping: To itemize deductions, individuals must maintain detailed records of their expenses, invoices, receipts, and other relevant documents. This meticulous record-keeping ensures accuracy and compliance during tax filing.
• Life Changes: Significant life events, such as buying a house, incurring major medical expenses, or making substantial charitable donations, can influence the decision to itemize deductions.
• Tax Law Changes: Tax laws are subject to change. Taxpayers need to stay informed about current regulations to make informed decisions about whether to itemize deductions or take the standard deduction.