How Much Should a New Consulting Firm Set Aside for Taxes?

Starting a consulting firm brings the thrill of independence, but it also brings the responsibility of managing your own taxes. Unlike a salaried job where taxes are withheld, you must set aside money yourself. A common rule of thumb is to save 25% to 35% of your net income for federal and state taxes. This range covers income tax, self-employment tax (Social Security and Medicare), and state taxes. But the exact percentage depends on your business structure, income level, and state. Here is how to calculate a precise number and set up a system that keeps you compliant and stress-free.

Why 25% to 35% Works for Most New Firms

For a sole proprietor or single-member LLC, you pay both income tax and self-employment tax. The self-employment tax is 15.3% (12.4% for Social Security and 2.9% for Medicare) on your net earnings. Federal income tax brackets start at 10% and go up to 37%, but your effective rate is lower. For a consultant earning $80,000 to $150,000 in net profit, the combined effective rate often lands between 25% and 30%. Add state income tax (ranging from 0% in Texas to 13.3% in California), and 30% to 35% is a safe buffer.

If you form an S-corp, you might pay yourself a reasonable salary and take distributions. The salary is subject to payroll taxes, but distributions are not subject to self-employment tax. This can lower your overall tax burden, but it requires payroll processing and compliance. In that case, setting aside 20% to 25% of distributions plus payroll taxes on salary is typical. However, for simplicity, most new firms start as sole proprietors or LLCs taxed as sole proprietors.

How to Calculate Your Personal Tax Rate

To know exactly how much to save, estimate your effective tax rate. Follow these steps:

1. Project your net income: Subtract all business expenses (software, marketing, travel, home office) from your projected revenue. For a new firm, use a conservative estimate.
2. Estimate federal income tax: Use the 2026 tax brackets (single filer): 10% up to $11,600, 12% up to $47,150, 22% up to $100,525, 24% up to $191,950. Calculate the tax on your taxable income (net income minus standard deduction, which is $15,000 for single filers in 2026).
3. Add self-employment tax: Multiply your net income by 92.35% (since you deduct the employer half), then apply 15.3%.
4. Add state tax: Check your state’s rate. For example, California’s marginal rate is 9.3% for incomes over $68,350, while Florida has no state income tax.
5. Divide total estimated tax by net income: This gives your effective rate.

For example, a single consultant with $100,000 net income in California:

• Federal income tax: about $15,000 (after standard deduction)
• Self-employment tax: about $14,100
• State tax: about $7,000
• Total: $36,100, or 36.1% of net income. So setting aside 35% would be slightly low; 40% is safer.

Use an online tax calculator or consult a CPA for precision. The key is to start with a percentage and adjust quarterly.

Set Up a Separate Tax Savings Account

Open a dedicated business savings account for taxes. Each time you receive a payment, transfer your set-aside percentage immediately. For example, if you decide on 30%, transfer 30% of every invoice payment to this account. Do not mix it with operating funds. This prevents accidental spending and ensures you have cash when taxes are due.

Many banks offer high-yield savings accounts with interest rates around 4% to 5% in 2026. Even a small balance earns interest, which can offset some costs. Automate the transfer using your bank’s app or a tool like QuickBooks, which can categorize tax savings as a separate account.

Pay Quarterly Estimated Taxes to Avoid Penalties

The IRS expects you to pay taxes as you earn income. If you owe more than $1,000 at tax time, you may face an underpayment penalty. To avoid this, make quarterly estimated tax payments. The due dates are typically April 15, June 15, September 15, and January 15 of the following year. Use Form 1040-ES to calculate and pay. You can pay online via IRS Direct Pay or the Electronic Federal Tax Payment System (EFTPS).

To calculate each payment, use the annualized income method or the regular installment method. For a new firm, the regular method works: divide your estimated annual tax by 4 and pay that amount each quarter. If your income fluctuates, the annualized method adjusts payments based on actual income, which can reduce penalties if you earn more later in the year.

State estimated taxes may also be required. Check your state’s tax agency website for due dates and forms. Some states align with federal dates, others differ.

Track Deductions to Lower Your Tax Bill

Every dollar of deductible expenses reduces your net income and thus your tax. Common deductions for consultants include:

• Home office (simplified method: $5 per square foot, up to 300 square feet)
• Business travel, meals (50% deductible), and entertainment (not deductible after 2018)
• Software subscriptions (e.g., CRM, accounting tools)
• Professional development and certifications
• Health insurance premiums (if self-employed)
• Retirement contributions (SEP IRA or Solo 401(k))

Keep meticulous records: save receipts, use accounting software like QuickBooks or FreshBooks, and reconcile monthly. A CPA can help you identify deductions you miss. For example, the qualified business income deduction (QBI) allows you to deduct up to 20% of your qualified business income, subject to income limits. This can significantly lower your effective rate.

Work with a Tax Professional

While you can handle taxes yourself, a CPA or enrolled agent can save you money and stress. They can help you choose the right business structure, set up payroll if needed, and plan for tax strategies. Fees range from $300 to $1,000 for basic tax preparation for a sole proprietor, and $1,500 to $3,000 for an S-corp with payroll. For a new firm, this is a worthwhile investment, especially if your income grows.

Interview potential CPAs: ask about their experience with consultants, their fee structure, and whether they offer year-round advice. Many offer quarterly check-ins to adjust estimated payments.

FAQ

What if I don’t set aside enough and can’t pay my taxes? The IRS offers payment plans, but interest and penalties accrue. You can apply for an installment agreement online. It’s better to pay as much as you can by the deadline and set up a plan. Avoid ignoring the bill, as the IRS can levy assets.

Can I pay taxes from my business account directly? Yes, but it’s risky. If you mix funds, you might spend the money. A separate savings account is a psychological and practical barrier. You can pay from the business account if you have a disciplined system, but most experts recommend separation.

Do I need to pay state taxes if I live in a no-income-tax state? No, but you may pay other taxes like franchise tax or gross receipts tax. For example, Texas has a franchise tax, and Washington has a business and occupation tax. Check your state’s rules.

How often should I review my tax savings rate? Quarterly, after each estimated tax payment. Compare your actual income to projections and adjust the percentage. If you have a big contract, increase the rate; if you have a slow quarter, you might lower it, but be cautious.

The Bottom Line

A new consulting firm should set aside 25% to 35% of net income for taxes, but the exact figure depends on your income, state, and structure. Calculate your effective rate using tax brackets, open a separate savings account, and make quarterly estimated payments to avoid penalties. Track deductions and consider hiring a CPA to optimize your tax strategy. Start with a conservative 30% and adjust after your first quarter. This discipline ensures you meet your obligations and keep more of what you earn.

Related guides

• How to File Quarterly Estimated Taxes as a New Consulting Firm
• 7 Questions to Ask Before Buying a New Consulting Firm