Set aside 25% to 30% of your net profit — what is left after expenses — and that covers self-employment tax, federal income tax, and most state income tax. That is the short answer to how much to set aside for taxes, and it is the target I use with everyone paid on a 1099, from roofers to rideshare drivers.

What percentage of my net income should I set aside for taxes?

Set aside 25% to 30% of your net business income — 25% in a state with no income tax, 30% in California, and 35% or more in an unusually profitable year. I set every 1099 client's target in that range: plumbers, roofers, HVAC techs, freelance designers, consultants, DoorDash and Uber drivers. The work is different; the tax math is identical.

This question comes up constantly, and the answer circulating online is usually close but vague. One poster on the TurboTax Community asked it almost word for word:

“How much should I be setting aside for taxes as a 1099 worker. Is it worth it?” — Confused20, TurboTax Community, October 2, 2021

My answer, sharpened into a habit: sweep 25 to 30 cents of every net dollar into a separate tax account the day the money hits your bank. The percentage always applies to profit after expenses, never to what you invoice. It is a planning target, not an IRS figure — your actual bill depends on filing status, state, and deductions — but it is built from the three real components below: self-employment tax, federal income tax, and state tax. For the bigger picture on entity choice, deductions, and quarterly planning beyond the set-aside itself, start at our self-employed and 1099 tax planning hub.

How does self-employment tax work in 2026?

Self-employment tax is 15.3% — 12.4% for Social Security and 2.9% for Medicare, the two rates set by IRC §1401 — charged on 92.35% of your net profit, not on your gross 1099 receipts. That arithmetic comes straight from Schedule SE (Form 1040): multiply net profit by 92.35% — the haircut written into IRC §1402(a)(12) — then apply 12.4% up to the wage base and 2.9% on everything. The 12.4% Social Security piece stops at the 2026 wage base — the earnings cap on the Social Security piece — of $184,500, per the Social Security Administration's 2026 COLA fact sheet; the 2.9% Medicare piece never stops. Most gig earners and first-year contractors never reach the cap.

Two more mechanics from the same form matter. First, the trigger: you owe SE tax once net self-employment profit hits $400 — there is no standard-deduction shield for SE tax. Second, you deduct half of your SE tax, the above-the-line deduction written into IRC §164(f) — “above-the-line” means it is subtracted before the standard deduction — which softens the income-tax hit later.

A concrete example. Say your net profit for 2026 is $100,000. The SE tax base is $100,000 × 92.35% = $92,350. The SE tax is $92,350 × 15.3% ≈ $14,130. That is the floor of your set-aside — you owe it even if deductions wipe out your income tax entirely. Our self-employment tax explainer for 1099 workers walks through the 15.3% rate, the 92.35% step, and the deductible half line by line.

How much federal income tax do I owe on top of SE tax?

Federal income tax stacks on top of SE tax, but three deductions pull your taxable income well below your net profit before the brackets ever apply: half your SE tax, the standard deduction, and the QBI deduction — the 20% qualified-business-income deduction most self-employed people get automatically. The most common first-year mistake is assuming the standard deduction wipes out the whole bill. One poster lived it:

“My 1099 Contractor work will not exceed my standard deduction of 14k income by year's end, likely will come in around 13k... Do I even need to pay them if my 1099 income will not exceed my standard deduction of 14k?” — NB36, TurboTax Community, August 28, 2024

“Even if your income is less than the Standard Deduction and you don't owe any regular income tax on it you will owe Self Employment tax... if you have a net profit (after expenses) of $400 or more you will pay 15.3% SE Tax on 92.35% of your net profit.” — VolvoGirl, reply in the same thread

NB36 had left a W-2 job mid-year, gone 1099 in July, and assumed that staying under the standard deduction meant owing nothing. VolvoGirl's answer is the whole lesson: SE tax runs on the first dollar of net profit over $400, regardless of the standard deduction. (The poster's $14,000 figure was the 2024 standard deduction; for 2026 the single standard deduction is $16,100, per Rev. Proc. 2025-32.)

That mistake is not hypothetical. In Clark v. Commissioner, T.C. Memo. 2025-13 (Docket No. 16969-22, filed February 4, 2025), a freelance movie-review writer since 1995 who also sold movie memorabilia on eBay received $8,250 from writing and $41,972 through PayPal in 2019 — PayPal sent a Form 1099-K. With help at an H&R Block location, he reported the $50,222 as “other income” on line 7a instead of on Schedule C, claimed the $12,200 standard deduction, and paid $4,369 of income tax. In June 2021 the IRS's Automated Underreporter program sent a CP2000, then a notice of deficiency for the self-employment tax. The Tax Court held he was liable for self-employment tax on both activities and for the $1,025 accuracy-related penalty — a $6,670 deficiency. Those are 2019 figures, and a T.C. Memo decides one taxpayer's facts, not a rule for everyone. The move it hands you: run SE tax first on every dollar of 1099 or 1099-K profit, then income tax, then sweep the set-aside the day you get paid.

Here is the income-tax piece with real 2026 numbers. Take a single filer with $60,000 of net profit and no other income:

• SE tax: $60,000 × 92.35% × 15.3% ≈ $8,478. Half of that, $4,239, comes off as an above-the-line deduction — subtracted before the standard deduction.
• QBI deduction: under §199A(a) the deduction is the lesser of two limbs. The QBI limb: 20% × ($60,000 − $4,239) = 20% × $55,761 ≈ $11,152. The taxable-income limb: $60,000 − $4,239 − $16,100 standard deduction = $39,661, and 20% × $39,661 ≈ $7,932. The deduction is the smaller figure, $7,932. Below the 2026 QBI threshold of $201,750 for single filers there is no phase-out — most 1099 workers are far below it (Rev. Proc. 2025-32).
• Taxable income: $39,661 − $7,932 = $31,729.
• Income tax on $31,729 (2026 single brackets): 10% of the first $12,400 = $1,240, plus 12% of the remaining $19,329 ≈ $2,319, for ≈ $3,559.

Total federal bill: $8,478 + $3,559 ≈ $12,037 — about 20.1% of the $60,000 net. That is why 25% carries a cushion in a no-income-tax state: the SE tax is the heavy piece, and the income tax on top is smaller than people fear once the three deductions land. Every legitimate business write-off pulls the effective rate down further — our guide to 1099 tax write-offs for gig workers was written for the same reader and lists what counts: mileage, phone, supplies, platform fees, home office, and health insurance, with where each goes on Schedule C.

Should I set aside taxes on gross or net income?

Always set aside based on net business income, never on gross. Net is what is left after materials, subcontractors, mileage, phone, software, and ordinary business expenses — you only pay tax on profit. If you invoice $150,000 on jobs but spend $60,000 on materials, subs, and expenses, your net is $90,000, and the 25% to 30% applies to the $90,000.

Workers who set aside a percentage of gross over-reserve and starve their own cash flow. Workers who set aside nothing until April under-reserve and end up on a payment plan. The net-income method is the one that matches the actual bill — and it only works if you track expenses, because every dollar of documented cost shrinks both the SE tax and the income tax. For gig drivers, mileage alone is usually the biggest expense — our guide to how to track mileage for taxes was written for first-year delivery and rideshare drivers and shows what the log has to contain. Our guide to 1099 tax write-offs for gig workers was written for you — no crews, no work trucks — and walks through mileage, phone, supplies, platform fees, home office, and health insurance, with where each goes on Schedule C.

How much extra should I set aside if my state has income tax?

In California, push the set-aside to 30% of net. California's income tax brackets add a real state bill on top of the federal one at ordinary working incomes, which is why I set the target at 30% there versus 25% in no-income-tax states like Texas, Florida, Nevada, and Washington.

In states with moderate income tax rates, split the difference — somewhere between 25% and 30%. The point is to match the set-aside to the actual total burden: SE tax plus federal brackets plus whatever your state adds. If you are not sure where your state lands, start at 30% and true it up after your first filed return.

What happens if I do not set aside enough?

The consequence is the underpayment penalty, which runs like interest on the shortfall rather than a flat fine, plus the practical problem of coming up with the full year's tax in one lump sum. For most 1099 workers who were slightly short, the penalty itself is modest — often a few hundred dollars. The real cost is the April scramble: if you set aside nothing and owe $20,000 at filing, you have to produce that cash all at once, on top of the current year's first quarterly payment.

Two things right-size the fear. First, an underpayment is a balance-due item with a mechanical penalty calculation — it is not an audit trigger. In FY2025 the IRS closed 497,621 audits against roughly 180 million returns filed, and most IRS contact is a mail-based document-matching letter, per the IRS compliance-presence data. Second, matching your return to your information forms prevents most of those letters. On that point, one 2026 change worth knowing: the 1099-NEC reporting floor is $600 for payments made in 2025 and rises to $2,000 for payments made in 2026, per the IRS 1099-MISC/NEC instructions. The form threshold changed — the tax did not. Income under the floor is still taxable, and you still report it.

If you are already behind, pay what you can by the next deadline. The penalty applies only to the shortfall, partial payments reduce it, and the IRS offers installment agreements for balances you cannot cover at once. The worst move is ignoring it, because interest keeps accruing until the balance is resolved.

What is the safe harbor for quarterly estimated taxes?

The safe harbor is a bright line written into IRC §6654: you avoid the underpayment penalty if your payments during the year cover the lesser of 90% of this year's tax or 100% of last year's tax — 110% of last year's if your prior-year AGI was over $150,000 ($75,000 if married filing separately). AGI is adjusted gross income, your income after certain adjustments. And if you owe less than $1,000 at filing, no penalty applies at all. The IRS's own Form 1040-ES for 2026 sets the quarterly due dates: April 15, 2026; June 15, 2026; September 15, 2026; and January 15, 2027.

This is the friendliest rule in the code for a first-year 1099 worker. You do not have to predict a volatile year — you base payments on last year's total tax, a number you already know. Say you owed $18,000 in total tax last year and your AGI was under $150,000. Pay in at least $18,000 across the four deadlines ($18,000 ÷ 4 = $4,500 per quarter) and you are penalty-proof even if this year comes in much bigger. You will still owe the balance at filing, but no penalty attaches. One caution: the protection only holds if you pay enough by each quarterly deadline, not just the annual total.

For a brand-new 1099 worker with no prior-year self-employment income, the current-year leg is the target — pay in 90% of what you will actually owe. That is exactly what the 25% to 30% set-aside builds toward. Our guide to paying quarterly taxes for the first time walks a first-year 1099 worker through the four 2026 dates, the safe harbor, and how to pay. When you send the payment, use EFTPS or IRS Direct Pay and keep the confirmation number — a paper trail matters if a payment is ever questioned.

Does my business entity change how much I set aside?

Yes — once net profit is high enough, the entity can move the percentage by several points. A sole proprietor, a single-member LLC, and a partner in a multi-member LLC all pay self-employment tax on the entire net profit. An S-Corp splits the income: you pay yourself a W-2 salary subject to payroll tax, and the rest comes out as distributions that carry no SE tax at all.

My standing position on the salary: roughly one-third of net profit as W-2 wages, provided it is reasonable for the role and industry. Take $120,000 of net profit. As a sole proprietor, the SE tax is $120,000 × 92.35% × 15.3% ≈ $16,956. As an S-Corp paying a $40,000 salary (one-third of net), the payroll tax on the salary is $40,000 × 15.3% = $6,120, and the remaining $80,000 of distributions carries no SE tax. The savings are roughly $10,800 a year, before the added costs of running payroll and the extra return.

My threshold: when net profit clears $80,000 to $100,000 and looks repeatable, run the S-Corp math. Below that, payroll costs and state franchise fees eat the savings. Our LLC vs S-Corp guide was written for trade contractors, but the comparison applies to any self-employed owner weighing the same election. If you do elect, your set-aside percentage drops because less of your profit is exposed to SE tax — but you also have payroll withholding coming out of the salary, so run the combined numbers rather than just lowering the percentage.

Can retirement contributions lower my tax set-aside?

Yes. Contributions to a SEP-IRA or Solo 401(k) reduce your taxable income dollar for dollar, which lowers the income-tax piece of your set-aside. For 2026, the defined-contribution ceiling is $72,000 for both plan types; a SEP is capped at 25% of compensation, while a Solo 401(k) adds a $24,500 employee deferral on top of the employer piece, per IRS Notice 2025-67.

One correction to a common misconception: these contributions cut income tax, not self-employment tax. SE tax is computed on net profit before any retirement deduction, so the $8,478 of SE tax in the $60,000 example above stays put no matter what you contribute. What the contribution does is shrink the income-tax layer — which means a worker who maxes a plan can set aside closer to the low end of the range and redirect the difference into the account. Our SEP-IRA vs Solo 401(k) comparison was written for trade contractors, but the plan mechanics and the choice between them apply to any self-employed owner.

The set-aside comes down to three components: self-employment tax at 15.3% on 92.35% of net profit, federal income tax on what is left after the half-SE deduction, the standard deduction, and QBI, and state income tax where your state charges one. The 25% to 30% of net target covers all three for most 1099 workers — freelancers, gig drivers, and trade contractors alike — and the safe harbor tells you exactly how much is enough to keep the penalty at zero.

Want a second set of eyes on your set-aside before the next quarterly deadline? N&T Tax & Advisory Group helps 1099 workers — freelancers, gig drivers, and trade contractors — set the right percentage, get current on quarterly payments, and keep every deduction they are entitled to, by phone or video, nationwide. Book a meeting with our team here.