How Much Should You Set Aside for Taxes?

One of the most common—and complex—questions I receive as a CPA concerns how much independent contractors or self-employed business owners should set aside for taxes.

If you aren’t already thinking about this, now is the time to start, if only to keep next year’s tax season less, well, taxing! So how much money should you be saving? I wish the answer were a simple number, but there are a lot of factors to consider. In fact, this question is the equivalent of a client asking a trainer, “How much should I lift?” or “How many calories should I be eating?” I imagine that when you’re faced with these questions, you counter them with many more: “How old are you?” “What is your history?” “Any injuries?” “What are your goals?”—and so on.

Similarly, when a CPA is asked about taxes, we need more information before we can give a decisive answer. There are many things to consider: sources and amounts of income, filing status, prior issues, and unpaid taxes, etc. To help you better prepare, here are a few things to consider and some actionable steps to take now.

Identify Significant Changes

Are you getting married this year? Buying a home? Starting a business? These types of events could influence how much you’ll owe in taxes and, thus, how much you need to save. If your tax situation this year is relatively similar to last year, look at how much you made and how much you paid in total taxes. Assuming nothing changes drastically, you could use this to estimate what you’ll owe—and need to save for—this year.

Determine Net Business and Taxable Income

If you own your own business or work as an independent contractor, you’ll want to adjust your savings approach. Many fitness professionals work as employees at gyms and studios and have taxes withheld automatically from each paycheck, but if some or all of your income is not already subject to withholding, it’s up to you to save and pay estimated taxes quarterly.

Another factor is that fitness professionals tend to have multiple income streams. You may work for several gyms and studios, train clients on your own, and take on special projects like writing articles, modeling or doing special events. Influencer income also counts. You must add up all income from all sources (yes, even PayPal, Venmo, cash, etc.) to arrive at your total income. Understand whether taxes have already been paid or withheld from these sources.

Once you know your total income, subtract the standard deduction (this changes each year, so make sure you have the right figure from the IRS website) and any other deductions for which you qualify. If you earn income as an independent contractor or self-employed business owner, you can also deduct qualifying business expenses. These deductions reduce the taxable business income. One of the most common mistakes I see is fit pros who don’t take advantage of all the possible business expense deductions.

Your net business income is what’s taxed, so having an accurate account of all your expenses can have a big impact in determining what you owe. If this is your first year in business, you’ll want to keep detailed records of your income and expenses so an accountant can help you file properly.

Understand Tax Tables and Brackets

If you add up all your income from wages and other sources, along with your net business income, and then subtract your deductions (including the standard deduction), you arrive at your taxable income. You can then use this taxable income figure to find the tax brackets for the year and compute an estimate of taxes owed. These tables are available online. Here’s a 2019 example, from Insider Inc.:

First, it’s important to see how the tax brackets work, as you’ll use multiple percentage rates to compute your taxes; different percentage rates apply as you “dissect” your income.

Let’s say you’re a single filer and have a taxable income of $100,000 (the amount you earned minus your deductions). The 24% rate does not apply to the entire $100,000 (so your taxes are not $100,000 x 24%). The 24% is the “marginal rate” applied to dollars over $84,200 (see the 24% line in the chart). You’ll start by calculating this tax. Then you’ll figure the taxes on the amount between $84,200 and $39,475 (the 22% line on the chart), and so on. The smaller the amount, the lower the percentage.

Using the 2019 tax bracket chart, let’s break it down.

Amount taxed at 24%: $100,000 – $84,200 = $15,800 (x 24% = $3,792)

Amount taxed at 22%: $84,200 – $39,475 = $44,725 (x 22% = $9,840)

Amount taxed at 12%:  $39,475 – $9,700 = 29,775 (x 12% = $3,573)

Amount taxed at 10%: $9,700 (x 10% = $970)

$3,792 + 9,940 + $3,573 + $970 = $18,175

In this scenario, your taxes total $18,175. It works out to be an “effective rate” of about 18%. This gives you a good idea of how much to save, but please keep in mind that nothing will be as accurate or reliable as working with a qualified professional to determine what you should set aside. This example is for illustrative purposes only.

Build Strong Savings Habits

Once you determine how much you should save, create a routine where you regularly put a certain dollar amount or percentage of your income in a tax savings account—either at a set frequency or at each sale. As fit pros, our income is not always steady and predictable, so having a goal in mind and setting aside the money right away will create positive habits. This will also allow you to operate your business with less stress as you approach quarterly-estimate deadlines. Think about opening a separate bank account and using automatic transfers. The more automated you make this process, the easier it will be to stick to it. You won’t even notice it is happening behind the scenes.

Now you can see just how complex it can be to answer the question “How much should I set aside for taxes?” But going through these exercises can give you more clarity. Work with your accountant or tax professional to make sure your savings and estimated payments are on track and you can gauge what to expect come tax time. Knowing you’re in good shape will give you greater peace of mind.

Note: The information contained within this article does not constitute individual tax advice and is to be applied with the assistance of a qualified tax professional.