How Much Should a New Architecture Firm Set Aside for Taxes?
Learn how much new architecture firms should set aside for taxes, including federal, state, and self-employment rates, with practical steps to avoid surprises.
Starting an architecture firm brings many financial questions, and taxes are often the most pressing. The short answer: new architecture firms should set aside 25% to 35% of net income for taxes. This range covers federal income tax, self-employment tax, and state taxes, but your exact rate depends on your business structure, location, and revenue. Below, we break down the numbers and give you concrete steps to calculate and manage your tax reserve.
Why 25% to 35% Is the Safe Range
For a sole proprietor or single-member LLC, the IRS treats your business profits as personal income. You pay two main federal taxes:
- Income tax: Progressive rates from 10% to 37%, depending on your taxable income.
- Self-employment tax: 15.3% (12.4% for Social Security, 2.9% for Medicare) on net earnings up to the Social Security wage base ($168,600 in 2026, adjusted annually).
If your firm is an S-corp or C-corp, you pay yourself a salary and the corporation pays payroll taxes, but you also face corporate income tax (C-corp) or pass-through taxation (S-corp). The 25% to 35% range still applies for most new firms, but let’s look at a realistic example.
Example: A new solo architect has $80,000 in net profit (after business expenses). For 2026, the self-employment tax is $80,000 × 15.3% = $12,240. Federal income tax on $80,000 (single filer, standard deduction of $14,600) is roughly $9,300. That’s $21,540, or about 27% of net profit. Add state taxes (e.g., 5% in California or 4.4% in Illinois), and you’re near 31%.
If your net profit is higher, say $150,000, the percentage climbs because you enter higher tax brackets. At $150,000, federal income tax is about $27,000, self-employment tax is $22,950 (capped at the wage base), and state tax adds $7,500. Total: $57,450, or 38% of net profit. So the 25% to 35% range is a solid baseline, but you may need more as you grow.
How to Calculate Your Specific Percentage
Follow these steps to get a precise number for your firm:
- Estimate your net profit: Subtract all business expenses (software, rent, insurance, marketing, etc.) from your projected revenue. Use last year’s numbers if you have them, or a conservative forecast.
- Calculate self-employment tax: Multiply net profit by 15.3%. If you have an S-corp, your salary is subject to payroll taxes, not your full profit.
- Estimate federal income tax: Use the IRS tax brackets for 2026 (single or married filing jointly). Subtract the standard deduction ($14,600 for single, $29,200 for married in 2026).
- Add state tax: Your state’s rate varies from 0% (Texas, Nevada) to 13.3% (California top bracket). Check your state’s tax agency for current rates.
- Divide by net profit: Add federal income tax, self-employment tax, and state tax, then divide by net profit to get your effective tax rate.
For a quick estimate, use the table below:
| Net Profit (Sole Proprietor) | Federal Income Tax (Single) | Self-Employment Tax | State Tax (5% average) | Total Tax | Effective Rate |
|---|---|---|---|---|---|
| $50,000 | $4,800 | $7,650 | $2,500 | $14,950 | 29.9% |
| $80,000 | $9,300 | $12,240 | $4,000 | $25,540 | 31.9% |
| $120,000 | $18,000 | $18,360 | $6,000 | $42,360 | 35.3% |
| $150,000 | $27,000 | $22,950 | $7,500 | $57,450 | 38.3% |
Note: Figures are estimates for 2026. Your actual tax may differ based on deductions and credits.
Set Aside Money Every Month, Not at Year-End
Don’t wait until April to find you owe thousands. Instead, create a separate tax savings account and transfer a percentage of every client payment. Here’s a simple system:
- Open a dedicated business savings account (e.g., a high-yield account at an online bank).
- Transfer 30% of every invoice payment into that account immediately. If your effective rate is lower, you’ll have a surplus, which is fine; you can use it for next year’s taxes or a bonus.
- If you have employees, add payroll taxes (FICA, federal unemployment) to your calculation. The employer portion is 7.65% of wages, and you must deposit it regularly.
- Track your quarterly estimated tax payments: The IRS requires quarterly payments if you expect to owe more than $1,000. Deadlines are typically April 15, June 15, September 15, and January 15. Use Form 1040-ES.
Action step this week: Log into your bank and set up an automatic transfer of 30% of your average monthly revenue to a new savings account. Even if you haven’t been doing this, start now.
Common Tax Deductions for Architecture Firms
Reducing your taxable income lowers the amount you need to set aside. Make sure you’re claiming all eligible deductions:
- Software and subscriptions: AutoCAD, Revit, Adobe Creative Cloud, project management tools.
- Hardware and equipment: Computers, monitors, printers, and office furniture (depreciated or expensed under Section 179).
- Home office: If you have a dedicated space, use the simplified method ($5 per square foot, up to 300 sq ft) or actual expenses.
- Professional fees: Licenses, continuing education, professional association dues.
- Business insurance: Professional liability, general liability, and health insurance premiums (if self-employed).
- Travel and vehicle: Mileage for client meetings and site visits (standard mileage rate for 2026 is $0.67 per mile).
- Marketing and website: Domain, hosting, advertising, and portfolio printing.
Keep receipts and use accounting software (e.g., QuickBooks) to track expenses monthly. A CPA can help you identify deductions specific to your situation.
What If You Underestimate?
If you set aside too little, you’ll face underpayment penalties. The IRS charges interest on unpaid taxes, plus a penalty of 0.5% per month on the unpaid amount. To avoid this, use the “safe harbor” rule: pay at least 100% of last year’s tax liability (or 110% if your adjusted gross income was over $150,000). This protects you from penalties even if your income rises.
If you discover a shortfall mid-year, increase your quarterly payments immediately. The penalty is based on the amount you underpaid, so catching up early reduces the damage.
FAQ
Q: Do I need to pay quarterly taxes as a new firm? A: Yes, if you expect to owe more than $1,000 in federal taxes. Most new firms will exceed this threshold. Pay quarterly using Form 1040-ES to avoid penalties.
Q: Can I set aside less if I have an S-corp? A: Possibly. In an S-corp, you pay yourself a reasonable salary (subject to payroll taxes) and take the rest as distributions, which are not subject to self-employment tax. Your overall tax rate may be lower, but you’ll have payroll tax filings. Still, 25% to 30% of net profit is a safe starting point.
Q: What if my state has no income tax? A: States like Texas, Nevada, and Wyoming have no state income tax, so your effective rate drops by 5% to 10%. In that case, 25% of net profit is often sufficient for federal taxes alone.
Q: Should I hire a CPA? A: For a new firm, a CPA can save you money by identifying deductions and ensuring compliance. Costs range from $200 to $500 for a basic tax return, but they often pay for themselves. Consider hiring one at least for your first year.
Related guides
- How to File Quarterly Estimated Taxes as a New Architecture Firm
- 7 Questions to Ask Before Buying a New Architecture Firm
The bottom line
Set aside 25% to 35% of your net profit for taxes, but calculate your specific rate using the steps above. Open a separate savings account, transfer 30% of every payment, and make quarterly estimated payments. Track deductions diligently to lower your taxable income. If you’re unsure, consult a CPA. Starting this habit now will prevent painful surprises and keep your firm financially healthy.