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

2026-08-21

New advisory firms should set aside 25-35% of net income for taxes. Learn the exact steps to calculate, save, and pay quarterly estimates.

Starting an advisory firm brings a new reality: you are now responsible for your own taxes. Unlike a W-2 job, no one withholds from your paychecks. The short answer: set aside 25% to 35% of your net income for federal and state taxes, plus self-employment tax. But the exact percentage depends on your entity type, state, and income level. This guide walks you through the math, the practical steps, and the common pitfalls so you can avoid a surprise tax bill.

Why 25% to 35% Is the Right Starting Point

Your tax burden as a business owner includes income tax (federal and state) plus self-employment tax (Social Security and Medicare) if you are a sole proprietor, partner, or LLC member. Self-employment tax alone is 15.3% on net earnings up to the Social Security wage base ($176,100 in 2026). On top of that, federal income tax brackets start at 10% and go up to 37%. State rates vary from 0% to over 13%.

For a new advisory firm with a modest income, a combined rate of 25% to 30% is typical. If you earn more, or live in a high-tax state like California or New York, plan for 35% or more. Here is a rough breakdown for a single filer with $100,000 in net profit (after business expenses) in 2026:

Self-employment tax: $15,300 (15.3% of $100,000)
Federal income tax: approximately $13,000 (based on 2026 brackets, standard deduction)
State income tax: $0 to $10,000 depending on state
Total: $28,300 to $38,300, or 28% to 38% of net profit

If you are married filing jointly, the federal tax is lower, but the percentage still lands in the 25% to 35% range for most new firms.

Calculate Your Effective Tax Rate

Your effective tax rate is the percentage of your net income that goes to taxes. To find it, you need to estimate your taxable income. Start with your gross revenue, subtract all legitimate business expenses (software, rent, marketing, professional fees, etc.), and you get your net profit. That is what you pay taxes on.

For a new firm, expenses are often low in the first year, so your net profit may be close to your revenue. That means a higher tax percentage. As your expenses grow, your net profit drops, and so does your tax bill.

Use this simple formula to estimate your set-aside percentage:

Estimate annual net profit.
Add self-employment tax: 15.3% of net profit.
Estimate federal income tax using the 2026 brackets (single: 10% up to $11,600, 12% up to $47,150, 22% up to $100,525, etc.).
Add state tax (check your state’s rate).
Divide the total by your net profit to get your percentage.

For most new advisors, that number lands between 25% and 35%. If you are unsure, use 30% as a safe default.

How to Set Aside the Money

Set aside money from every client payment, not just at the end of the year. Open a separate business savings account specifically for taxes. Transfer a fixed percentage of each deposit into that account. For example, if you decide on 30%, transfer $300 for every $1,000 you receive.

Automate this: set up a rule in your bank or accounting software to automatically move the percentage into your tax account. This prevents the temptation to spend it. If you use a payroll service or accounting software like QuickBooks, you can set up a tax savings goal.

A good target is to have enough saved to cover your quarterly estimated tax payments. If you are behind, catch up gradually by increasing your set-aside percentage for a few months.

Quarterly Estimated Taxes: What You Need to Know

The IRS expects you to pay taxes quarterly if you expect to owe more than $1,000. The due dates are April 15, June 15, September 15, and January 15. Each payment covers a quarter of your estimated annual tax liability. If you underpay, you may owe penalties and interest.

To calculate your quarterly payment, use Form 1040-ES. You can base it on last year’s tax (if you had any) or on your current year’s estimate. Many new firms use the annualized method, which lets you pay based on actual income each quarter, but that is more complex. For simplicity, take your estimated annual tax and divide by four.

If your income is irregular, you can adjust payments: pay more in a quarter when you have a big month, less when you have a slow one. The key is to pay at least 90% of your current year’s liability to avoid penalties.

What If You Miss a Payment?

If you miss a quarterly deadline, pay as soon as possible. The IRS charges a penalty based on how much you owe and how late you are. The penalty rate is roughly 5% per month on the unpaid amount, but it can be lower if you have a reasonable cause. You can also request a payment plan if you cannot pay in full.

To avoid penalties, set reminders for the due dates. Many accounting software programs include tax payment reminders. You can also use the IRS Direct Pay system to make payments online.

Tax Deductions Every Advisory Firm Should Use

Maximize your deductions to lower your taxable income, which in turn lowers your tax set-aside. Common deductions for advisory firms include:

Home office deduction (if you have a dedicated space)
Business use of your car (mileage or actual expenses)
Professional fees (CPA, attorney, compliance consultants)
Software subscriptions (CRM, financial planning tools, accounting software)
Marketing and advertising costs
Continuing education and conferences
Health insurance premiums (if you are self-employed)
Retirement plan contributions (SEP IRA, Solo 401(k))

Keep detailed records of all expenses. Use a separate credit card for business purchases to simplify tracking. A good accountant can help you identify deductions you might miss.

Use a CPA or Tax Professional

Taxes for a business are more complex than personal taxes. A CPA or enrolled agent who works with advisory firms can save you money and stress. They can help you choose the right entity structure (S-corp vs. LLC), optimize your deductions, and prepare your quarterly estimates. Fees range from $300 to $1,000 for a basic business tax return, and $150 to $300 per quarter for estimated tax planning. That cost is deductible.

If you are just starting, you might be tempted to use DIY software. That works if your situation is simple, but as you grow, a professional becomes worth the investment.

FAQ

Q: What if I don’t have enough saved for my quarterly payment? A: Pay as much as you can by the deadline. The penalty is based on the shortfall, so partial payment reduces the penalty. Then adjust your set-aside percentage upward for the next quarter.

Q: Should I set aside more if I’m in a high-tax state? A: Yes. Add your state tax rate to your federal and self-employment tax. For example, California’s top rate is 13.3%, so your total could be 40% or more. Use 35% to 40% as your set-aside in that case.

Q: Can I change my set-aside percentage during the year? A: Absolutely. Review your net profit each quarter and adjust. If you had a slow first half, you might lower the percentage; if you had a great month, increase it.

Q: What is the penalty for underpaying estimated taxes? A: The IRS charges interest plus a penalty, which is roughly 5% of the underpaid amount per month, but it can be less if you meet one of the safe harbor rules. Paying at least 100% of last year’s tax (or 110% if your income is over $150,000) avoids the penalty.

The Bottom Line

Set aside 25% to 35% of your net income for taxes, and adjust based on your state and income. Open a separate tax savings account, automate transfers, and pay quarterly estimates on time. Use every deduction you qualify for, and consider hiring a CPA. By planning ahead, you avoid the stress of a large tax bill and keep your advisory firm on solid financial footing. Start today: calculate your effective rate, set up your savings account, and mark the next quarterly deadline on your calendar.