I've been self-employed doing graphic design for a few months now and I'm making pretty good money, but I have no idea how much I need to set aside each month for when tax season comes around. Is there some formula or percentage I should be applying?
Don't just go by whatever percentage someone tells you - what really matters is figuring out how much you actually earned net after you subtract all your deductible expenses, because that's what the tax authority is going to charge you on.
A trick that works well is doing a quick projection every quarter: take your income for that period, subtract your expenses (equipment, software, internet, whatever you use for work), multiply that by your autonomous community's tax rate (they usually range from 19-45% depending on where you are), and that number is what you need to set aside. That way you won't come up short or have extra money sitting around unnecessarily, plus you get to see how the year is going without any nasty surprises when you file.
The most important thing is to set aside between 20% and 30% of what you earn each month, depending on your location and your specific tax situation. There's no single formula because the percentage varies depending on whether you have deductible expenses (software, equipment, internet), your income level, and whether you're using the standard or simplified tax regime. Ideally you'd consult with a tax advisor or accountant who knows your situation, because while some freelancers get by with 20%, others need to put aside more if they have few deductible expenses 💰
Do you have any idea what your actual margin is after expenses, or are you counting gross income? Because your taxable base isn't what you earn but what's left after you deduct business expenses, and that's where a lot of people mess up and set aside more than they need to. The typical range is somewhere between 20-30% of net profit (not revenue), but I'd recommend something practical: open a separate savings account and put the percentage you calculate directly into it each month without touching it, so you're not tempted to spend it. Also make sure to check in with a tax advisor in October or November to adjust as you go if you see you're going to have more or less taxable income than expected, because you're still far from tax return season and there's always surprises.
The percentage you need to set aside really depends on whether you've already filed anything or if this is your first year, because tax authorities can hit you with a surprise from back taxes owed. My advice is don't rely just on a fixed percentage: open a separate account and put in what you think they might ask for (yeah, that 20-30% people mention is a good starting point), but also figure out what your actual deductible expenses are each month, because the fewer expenses you record, the more taxes you'll pay. If you're earning decent money right now, consider calling an accountant even just once to get a quick estimate based on your actual numbers, not generic percentages, because the difference between doing things right now and having nasty surprises in April is totally worth it!
When I started working like that, I ended up saving way too little the first year and then got absolutely shocked when tax time came around. What worked for me was opening a separate account and putting 25% of every payment I received straight into it, without touching it; that way I wasn't tempted to spend it. But the important thing is that you don't set aside money based on your gross income: first subtract your actual expenses (software, internet, equipment), because the tax authorities tax you on what's left, not on everything that comes in. If you're still not clear on what your deductible expenses are, be careful and set aside a slightly higher percentage, because it's better to have leftover money than to come up short when April rolls around.
The withholding they apply to you as a self-employed person is 15% on invoices to businesses or 19% if you work with individuals, so that money already comes out of what you earn. What you need to set aside on top of that is the difference between that 15-19% and what you're actually going to pay in taxes, which depends on your income tax bracket. If you're earning well and you're in the 37% or 45% bracket, you're going to have to save quite a bit more after they've already withheld; if on the other hand you're lower, sometimes you even get a refund. The key is knowing how much is left after real expenses (software, space rental, equipment, etc.) because that's what you calculate taxes on, not what went into your account.
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