How Much Should You Set Aside for Taxes? A Simple Money System for Small Business Owners

When you worked a W-2 job, taxes usually came out before your paycheck reached your bank account. As a business owner, much of that responsibility moves to you. Income may arrive in uneven chunks, and a healthy-looking checking balance can include money already needed for bills and taxes.

Start with four buckets: business checking for income and operating expenses, tax savings for upcoming tax payments, business savings for slow months and unexpected costs, and personal checking for your owner pay. Separate accounts make those boundaries easier to see and harder to ignore.

Keep personal spending out of business checking. And keep the tax reserve off-limits for equipment, vacations, or a payroll shortfall. You do not need a complicated spreadsheet to understand what is available when every dollar has a clear job.

A $12,000 deposit is not necessarily $12,000 you can divide between taxes, savings, and yourself. You still have to cover the costs of earning that money. Start with reliable books showing business income minus business expenses, then check what cash the business actually needs before making transfers.

For a simple starting allocation, reserve 25–30% of profit for taxes, 10% for business savings, and the remaining 60–65% for planned owner pay. At a 30% tax reserve, that becomes a straightforward 30/10/60 split. These are planning percentages, not required tax rates or a guarantee that the remainder is safe to withdraw.

Profit and available cash are not always the same. Customer invoices may still be unpaid, loan principal payments use cash without generally being a deductible expense, and equipment purchases can have different tax and cash-flow timing. Upcoming rent, payroll, inventory, and other commitments come first. A percentage system works best when it sits on top of accurate bookkeeping rather than replacing it.

For many sole proprietors and owners of single-member LLCs taxed as sole proprietorships, the tax bill includes federal income tax, self-employment tax, and state income tax where applicable. Those are different layers. Reserving only for income tax can leave you short when the self-employment portion is added.

The 25–30% range is a useful place to begin a conversation, not a number that fits every owner. Your filing status, other household income, deductions, credits, withholding, and business structure all matter. Montana owners should account for state taxes too, using the rules for the applicable tax year rather than assuming an old rate still applies.

A growing business or a household with substantial other income may need a larger reserve. A lower-income owner with significant credits or existing withholding may need less. Have your tax preparer project the actual annual bill and translate it into a reserve amount and payment plan. The goal is to replace a rough percentage with a number grounded in your circumstances.

Choose a regular rhythm — twice a month or after your monthly books are closed — and use it consistently. Review income, expenses, upcoming bills, and the current tax projection. Then move the appropriate amounts into the tax and business savings accounts before deciding what to pay yourself.

Here is a simple illustration. Suppose you collected $12,000, had $4,000 of business expenses, and have no additional cash commitments affecting this example. That leaves $8,000. A 30/10/60 allocation puts $2,400 into tax savings, $800 into business savings, and $4,800 toward owner pay. The arithmetic is simple; confirming that the business can afford the transfers is the important part.

Set owner pay at an amount and frequency the business can sustain rather than treating every good week as permission to empty the account. A fixed schedule makes your household budget easier to manage. If income is seasonal, base that schedule on a conservative picture of the year, not your busiest month.

A tax savings account solves the cash problem. It does not, by itself, satisfy your obligation to pay taxes during the year. Depending on your situation, you may need federal and state estimated payments, additional withholding, or a combination of the two.

Estimated payments generally follow four payment dates during the year, but the income periods are not four equal calendar quarters. Check the current federal and Montana schedules, including weekend, holiday, and any applicable relief adjustments. Your tax preparer can confirm which payments you need and when they should be made.

Pay estimates from the tax reserve and keep confirmation records. Have the amounts reviewed as income changes. Prior-year payment rules can sometimes help avoid an underpayment penalty, but avoiding a penalty is not the same as covering your final tax bill. Uneven income may also call for a different calculation rather than simply dividing everything by four.

If your business is an S corporation and you work in it, owner pay is not just a transfer from business checking. Reasonable compensation generally needs to run through payroll, with the related withholding and payroll taxes handled properly. Distributions are separate from wages.

Do not apply a tax percentage only to the distributions you withdraw and assume retained profit is tax-free. S-corp income generally passes through to shareholders and can create personal income tax even when the business keeps the cash. Payroll withholding may cover part of your total liability, but the remaining amount still needs to be planned for.

Partnerships and C corporations have their own rules too. If multiple owners share a business, agree on a documented payment approach that respects the entity's tax treatment and ownership arrangements. The four-bucket idea can still help organize cash, but it does not replace payroll, distribution, or entity-specific requirements.

The savings bucket is what keeps a slow month or a broken piece of equipment from becoming an emergency. Putting 10% of profit aside is one possible starting habit. A longer-term goal might be several months of essential operating expenses, with the target based on how seasonal your income is and how quickly you could replace lost revenue.

Once that cushion is in place, review whether some future savings should go toward planned equipment, debt reduction, or retirement. Those decisions have different cash-flow and tax consequences. Do not drain the operating reserve just because a retirement contribution might produce a deduction.

Review the system when profit changes, you hire employees, your household income shifts, or you change business structure. At Marlow Accounting in Billings, we can help connect your bookkeeping, tax projection, and owner-pay plan so the numbers work together. The goal is not perfect percentages. It is knowing what you can spend, what you need to keep, and what to pay before the bill arrives.

This article is general information, not tax, legal, or accounting advice for your specific situation. The percentages and dollar amounts are illustrative budgeting starting points, not a calculation of your tax liability or a guarantee against underpayment penalties. Your income, business structure, withholding, and other circumstances determine the right plan. Call Marlow Accounting at (406) 290-1214 or schedule a free consultation to review your numbers before putting a system in place.