How much should a founder set aside for taxes?

The quick answer is 25 to 30% of profit. Here's where that number comes from and when it's wrong.

The most common question from first-year founders: “How much of this should I not spend?” Here’s a starting point.

The rule of thumb: 25 to 30% of profit

If you’re a sole proprietor or single-member LLC, setting aside 25 to 30% of your profit (not revenue) is a reasonable place to start. It roughly covers three things.

Where it goes

Federal income tax. Depends on your total income and bracket.
Self-employment tax. This one surprises people. As a self-employed person, you pay both the employee and employer sides of Social Security and Medicare: 15.3% on most of your net self-employment earnings (the Social Security part stops above an annual wage cap).
State income tax. Varies a lot by state. Some have none, and some take a big bite.

When the number is wrong

Higher income: at higher brackets, 30% can be too low.
High-tax states: add a few points.
An S-corp: the math changes, because part of your pay is salary with withholding and part is distributions without self-employment tax.
A loss year: you might owe little or nothing, but don’t assume it until the books are closed.

How to actually do it

Open a separate savings account just for taxes.
Every time a client pays you, move your percentage over right away. Treat it like it was never yours.
Pay your quarterly estimated taxes from that account.
Look at your actual numbers each quarter and adjust the percentage if needed.

The short version

Start with 25 to 30% of profit, keep it in a separate account, and pay quarterly estimates from it. Then let your real numbers refine the percentage. If you’re a TEO client on the Accounting plan, we calculate your quarterly estimates from your closed books, so the guesswork goes away.