Should I save from revenue or profit?

Profit. Taxes are calculated on net income after deductible expenses — not gross revenue. A sole prop with $200k in revenue and $80k in expenses has roughly $120k in taxable profit. Saving 30% of $200k would over-save by a large margin; saving nothing because 'most of it is expenses' is how people end up with a $30k surprise in April.

Is 25% enough for taxes?

It depends on your full picture. At $100k in net self-employment income as a sole prop in California, the combined effective rate is typically 28–33% — so 25% would leave you slightly short. At $200k net profit, you're in higher brackets and 25% would likely leave a meaningful gap. 30% of profit is a safer starting point for most California owners in the $100–300k range.

I have a spouse with a W-2 job. Does that affect how much I save?

Yes, and it usually increases your rate. W-2 withholding from a spouse's job doesn't automatically cover your self-employment income. More importantly, your combined income pushes you into higher federal tax brackets. An owner with $150k in business profit and a spouse earning $100k isn't in the 22% bracket — they're in the 24% bracket on the business income (and potentially 32% on the upper portion). Factor in the household income picture when setting your savings rate.

I'm an S-corp owner. What should I save from my K-1 distributions?

Your W-2 salary already has withholding, so that part is covered. For K-1 pass-through income, the tax owed is regular federal income tax at your marginal rate (plus California). There's no SE tax on K-1 distributions — that's one of the benefits of S-corp structure. Save roughly your marginal federal rate plus California marginal rate on K-1 income. At $200k combined income that's typically 24% federal + 9.3% California = about 33%.

What's the easiest system for actually doing this?

Open a separate HYSA (high-yield savings account) at a different bank than your operating account. Set a monthly automatic transfer of your target percentage the day after each month ends when you can estimate the month's profit. When a quarterly payment is due, you'll have the money waiting — and any overage stays as a buffer for the next quarter.

Tax planning

How Much Should I Save Each Month for Taxes?

A practical monthly tax savings formula for small business owners — why profit (not revenue) is the starting point, what rate to use, and how the number changes for S-corps, sole props, and California owners.

Written by Matt Reese, CPA · 5 min read · Published April 2026·Share on LinkedIn

Key Takeaways

Save from profit, not revenue. Taxable income is what taxes are based on — not gross deposits.
Sole props and single-member LLCs owe self-employment tax (15.3% on the first ~$184,500) on top of income tax. The combined rate can be 40%+ in California at moderate income.
S-corp owners save on the W-2 portion automatically via withholding — but still need to save for K-1 pass-through income separately.
A starting range: 25–30% of net profit for most California owners at $100–200k income. Adjust once you have last year's actual tax rate.

The most common mistake: saving from revenue

Most first-year business owners who end up with a surprise tax bill made the same calculation error: they looked at bank deposits and assumed that was their income. It isn’t.

Taxes are calculated on net taxable income— profit after deductible business expenses. If you save a percentage of revenue instead of profit, you’ll oversave on low-margin businesses and badly undersave on high-margin ones (like most service businesses).

Save from profit. Taxes are calculated on what’s left after deductible expenses — not on what came in.

What rate to start with

The right rate depends on your total tax picture — filing status, state, entity type, other income, and deductions. But you need a starting point before you have all that data. Here’s a practical guide:

Annual net profit	Sole prop / LLC (CA)	S-corp owner — K-1 income (CA)	Why it differs
$50,000	30–35%	22–27%	SE tax (15.3%) adds significantly for sole props; S-corp K-1 has no SE tax
$100,000	32–37%	26–31%	Higher income brackets plus CA 9.3% rate; SE tax still applies to sole props
$200,000	35–40%	30–35%	Federal 32–35% bracket plus CA 9.3% for S-corp; sole props add SE tax on first $168.6k
$300,000+	38–42%	33–38%	NIIT may apply; CA rate stays 9.3% through ~$312k then increases

These are ranges, not exact calculations. The right number requires your actual income picture. Use these as a floor — if you hit one of these rates, you’re unlikely to be dramatically short.

Why sole props and S-corps save differently

Self-employment tax is the biggest driver of the gap between entity types. Sole props (and single-member LLCs taxed as sole props) owe 15.3% in self-employment tax on the first ~$184,500 of net earnings, then 2.9% above that. Half of SE tax is deductible, which helps, but the net hit is still roughly 13–14% on net earnings up to the threshold.

S-corp owners don’t pay SE tax on K-1 distributions — they pay payroll taxes on W-2 wages only. That’s why the breakeven point for S-corp election matters: above a certain income, the SE tax savings outweigh the added cost of payroll.

Tax comparison — $150,000 net business profit, single filer, California

— Sole prop/single-member LLC

SE tax (15.3% × 92.35%)≈ $21,240

Federal income tax (after SE deduction, standard deduction, QBI)≈ $19,800

California income tax≈ $11,200

Total tax≈ $52,240 (35% of profit)

— S-corp (salary $70k, K-1 $80k)

Payroll tax (employer + employee on $70k)≈ $10,710

Federal income tax≈ $20,100

California income tax≈ $11,200

Total tax≈ $42,010 (28% of profit)

Annual tax savings from S-corp structure≈ $10,230

At $150k profit, the S-corp structure saves roughly $10k in taxes. The monthly savings rate for the sole prop (35%) is materially higher than for the S-corp owner (28%). The S-corp owner needs to save on both W-2 withholding (automatic) and K-1 distributions (manual).

The monthly system: how to actually do it

The best system is simple enough to actually run. Here’s what works for most solo operators:

Open a separate high-yield savings account (HYSA) specifically for taxes. Keep it at a different bank from your operating account to reduce temptation.
At the end of each month, pull your P&L from your bookkeeping software. Find net profit for the month.
Transfer your target rate (25–35% for most California owners) into the tax savings account.
When a quarterly payment is due, use the money in that account to pay IRS Direct Pay and FTB Web Pay. Any excess stays as a buffer.
Recalculate your rate annually once you have a full year of actual data — or whenever income changes significantly.

The tax account earns you money while it waits

At 4–5% APY in a HYSA, $25,000 sitting in a tax savings account earns $1,000–1,250 per year. Save early, don’t wait until the day before the payment is due.

S-corp owners: two pots to manage

If you pay yourself a W-2 salary through an S-corp, your payroll already withholds for income tax and payroll tax on wages. You don’t need to separately save for that. But you do need to save for the K-1 pass-through income — the profit that flows to your personal return without withholding.

A common mistake: S-corp owners see payroll withholding as “taking care of taxes” and stop there. If your K-1 share is $100k and you’re in the 24% federal + 9.3% California bracket, that’s $33,000 in additional tax due — without a dollar of withholding applied.

When to recalculate

Your savings rate should float with your actual results. Situations that should trigger a recalculation:

Profit is materially higher or lower than last year
You got married, divorced, or had a major change in household income
You changed entity structure (sole prop to S-corp or vice versa)
You made a large retirement contribution that reduces taxable income
You moved to or from California

A mid-year tax projection from your CPA — typically done in July or October — gives you the actual number instead of an estimate.

You might also read

Tax planning

How to Pay Quarterly Taxes as a Small Business Owner

What estimated taxes are, when they're due, and how to avoid surprise bills by saving the right amount throughout the year.

Tax planning

What Proactive Tax Planning Actually Looks Like

Filing a return tells you what already happened. Planning changes what the next one looks like. Here's what the difference looks like in practice.

Tax deductions

What Counts as a Business Write-Off?

The ordinary-and-necessary standard, common deductible expenses, and why personal charges don't become write-offs just because they clear the business account.

Sources & References

Frequently asked

Questions owners actually ask

Should I save from revenue or profit?: Profit. Taxes are calculated on net income after deductible expenses — not gross revenue. A sole prop with $200k in revenue and $80k in expenses has roughly $120k in taxable profit. Saving 30% of $200k would over-save by a large margin; saving nothing because 'most of it is expenses' is how people end up with a $30k surprise in April.
Is 25% enough for taxes?: It depends on your full picture. At $100k in net self-employment income as a sole prop in California, the combined effective rate is typically 28–33% — so 25% would leave you slightly short. At $200k net profit, you're in higher brackets and 25% would likely leave a meaningful gap. 30% of profit is a safer starting point for most California owners in the $100–300k range.
I have a spouse with a W-2 job. Does that affect how much I save?: Yes, and it usually increases your rate. W-2 withholding from a spouse's job doesn't automatically cover your self-employment income. More importantly, your combined income pushes you into higher federal tax brackets. An owner with $150k in business profit and a spouse earning $100k isn't in the 22% bracket — they're in the 24% bracket on the business income (and potentially 32% on the upper portion). Factor in the household income picture when setting your savings rate.
I'm an S-corp owner. What should I save from my K-1 distributions?: Your W-2 salary already has withholding, so that part is covered. For K-1 pass-through income, the tax owed is regular federal income tax at your marginal rate (plus California). There's no SE tax on K-1 distributions — that's one of the benefits of S-corp structure. Save roughly your marginal federal rate plus California marginal rate on K-1 income. At $200k combined income that's typically 24% federal + 9.3% California = about 33%.
What's the easiest system for actually doing this?: Open a separate HYSA (high-yield savings account) at a different bank than your operating account. Set a monthly automatic transfer of your target percentage the day after each month ends when you can estimate the month's profit. When a quarterly payment is due, you'll have the money waiting — and any overage stays as a buffer for the next quarter.

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Educational content only.This article is for informational purposes and does not constitute tax, legal, or investment advice. Every owner’s facts are different; consult a qualified CPA and advisor before acting. Tax and accounting services are provided through Matt Reese, CPA; investment advisory services are provided through Measured Risk Portfolios, a registered investment adviser. Matt Reese, CPA and Measured Risk Portfolios are separate entities; clients are not required to engage both.