How Much Should a Small Law Firm Set Aside for Taxes?

For a small law firm, tax planning is not optional. The IRS expects quarterly estimated payments, and missing them triggers penalties. As a rule of thumb, set aside 30% to 40% of your net income for taxes. This covers federal income tax, self-employment tax (if you are a sole proprietor or partner), and state taxes. The exact amount depends on your entity type, state, and income level. Below, we break down the numbers and give you a step-by-step plan.

Why 30% to 40%? A Breakdown of Tax Rates

Your tax burden is not a single flat rate. It is a combination of federal income tax, self-employment tax, and state taxes. Here is what you can expect for 2026.

Federal Income Tax (Marginal Rates)

For 2026, the federal marginal tax brackets for single filers are:

• 10% on income up to $11,600
• 12% on income from $11,601 to $47,150
• 22% on income from $47,151 to $100,525
• 24% on income from $100,526 to $191,950
• 32% on income from $191,951 to $243,725
• 35% on income from $243,726 to $609,350
• 37% on income over $609,350

For married filing jointly, the brackets are roughly double. Your effective rate is lower than your marginal rate, but for planning, use your marginal rate because additional income is taxed at that rate.

Self-Employment Tax

If you are a sole proprietor, partner, or LLC owner treated as a sole proprietor, you pay self-employment tax. This covers Social Security and Medicare. The rate is 15.3% on net earnings up to $168,600 (for 2026), and 2.9% on earnings above that. The good news: you can deduct the employer half of self-employment tax when calculating your adjusted gross income, but you still need to set aside the full 15.3%.

State Taxes

State income tax rates vary widely. Some states have no income tax (Texas, Florida, Nevada), while others have rates up to 13.3% (California). The average state rate for high earners is around 5% to 9%. If you are in a state with no income tax, your total set-aside can be lower, around 25% to 30%. If you are in a high-tax state, plan for 40% or more.

Example Calculation

Assume you are a solo attorney in Texas (no state tax) with a net profit of $150,000. Your federal income tax (single) is roughly $29,000 (using 2026 brackets). Self-employment tax is 15.3% of $150,000, which is $22,950. Total federal tax is about $51,950, or 34.6% of net income. Add a small buffer, and 35% is a safe set-aside.

In California, the same income would incur about $11,000 in state tax, bringing the total to $63,000, or 42%. So a 40% set-aside is prudent.

How to Calculate Your Set-Aside Percentage

Follow these steps to find your personal number.

1. Estimate your net income for the year. Use last year’s profit plus expected growth. If you are new, use a conservative projection.
2. Calculate federal income tax using the brackets above. Use tax software or a tax professional for accuracy.
3. Add self-employment tax if applicable: 15.3% of net earnings up to the Social Security cap.
4. Add state tax based on your state’s rate. Check your state’s tax website for brackets.
5. Divide total tax by net income to get your percentage. Add 2% to 5% as a buffer for unexpected income or rate changes.

For most small law firms, the result will be between 30% and 40%. If you have a corporation (S-Corp), your salary is subject to payroll taxes, and you may have different planning, but the set-aside range is similar.

Quarterly Estimated Payments: How Much and When

The IRS requires quarterly estimated payments if you expect to owe more than $1,000 in tax. The due dates for 2026 are:

• April 15, 2026
• June 15, 2026
• September 15, 2026
• January 15, 2027

Each payment should be 25% of your total estimated tax. If you underpay, you may face a penalty, even if you pay the full amount by April 15. The penalty is based on the federal short-term rate plus 3%, currently around 5% per year, but it adds up.

To avoid penalties, use the safe harbor rule: pay at least 100% of your previous year’s tax liability (or 110% if your adjusted gross income was over $150,000). This is a good baseline if your income fluctuates.

Practical Steps to Set Aside Money This Week

You do not need a complex system. Here is what to do now.

1. Open a separate business savings account specifically for taxes. Do not mix it with operating funds. Many banks offer high-yield savings accounts with rates around 4% to 5% APY, so your money grows while you wait.
2. Transfer a percentage of every client payment into that account. For example, if you set aside 35%, move 35% of each deposit immediately. Automate this with your bank’s app or accounting software.
3. Use accounting software like QuickBooks or Xero. They can categorize tax payments and show you your net income in real time. Set up a rule to flag tax liabilities.
4. Review your set-aside quarterly before each estimated payment. Adjust if your income changes. If you have a slow quarter, you may need to pay less, but do not skip payments.
5. Pay your estimates online via the IRS Direct Pay system or the Electronic Federal Tax Payment System (EFTPS). It takes 10 minutes and gives you a receipt.

What If You Underpaid? Options to Catch Up

If you did not set aside enough, do not panic. You can increase your withholding or make extra payments. The IRS allows you to adjust your estimated payments mid-year. If you owe more than you have, consider:

• Paying the balance by April 15 to avoid late payment penalties, which are 0.5% per month on the unpaid amount.
• Setting up an installment agreement if you cannot pay in full. The IRS charges a setup fee of $31 to $225, but interest and penalties continue.
• Using a credit card with a rewards program, but only if you can pay it off quickly. The convenience fee is around 2%.

The best move is to increase your set-aside percentage for the rest of the year to cover the shortfall.

FAQ

What percentage of my income should I set aside for taxes as a solo attorney?

For a solo attorney, set aside 30% to 40% of net income. If you are in a no-income-tax state and your income is under $100,000, 30% may suffice. In high-tax states like California or New York, use 40%.

Do I need to pay quarterly taxes if I have an S-Corp?

Yes. As an S-Corp owner, you must pay yourself a reasonable salary, and payroll taxes are withheld. But you also need to make estimated payments for your share of profits. The same 30% to 40% range applies, but your accountant can help you fine-tune it.

Can I deduct my tax payments as a business expense?

No. Federal and state income taxes are not deductible on your federal return. However, you can deduct the employer half of self-employment tax (7.65%) as an adjustment to income. State taxes are deductible on your federal return if you itemize, subject to the $10,000 state and local tax (SALT) cap.

What happens if I miss a quarterly payment?

You will owe a penalty, which is calculated based on the amount you underpaid and the number of days late. The penalty is roughly 5% per year, but it can be avoided if you pay the full amount by the next quarter or by April 15. The IRS also offers a waiver if you show reasonable cause, but that is rare.

The Bottom Line

Set aside 30% to 40% of your net income for taxes. Open a separate savings account, automate transfers, and pay quarterly estimates on time. Use the safe harbor rule to avoid penalties. Review your numbers each quarter and adjust as needed. With a simple system, you can avoid tax surprises and keep your firm financially healthy.

Related guides

• How Much Should a Solo Attorney Practice Set Aside for Taxes?
• What Taxes Does a Small Law Firm Pay? A Complete Guide