Short answer: set aside 25–35% of your profit every time you get paid, in a separate account you don’t touch. Then fine-tune the percentage once you know your real rate.
The rest of this guide explains why that range is a sensible start, how to find your own number, and how to build a habit that takes about a minute per payment.
Why freelancers get caught out
When you’re employed, tax comes out of your pay before you see it. When you freelance, clients pay you the full amount, and the tax bill arrives months later, sometimes more than a year later. By then the money has usually been spent.
Many countries also expect self-employed people to pay in advance: quarterly estimated payments in the US, payments on account in the UK, or advance payments in much of Europe. So in your second year you may face last year’s bill and an advance on this year’s at the same time.
Step 1: work on profit, not income
Tax is usually charged on profit: what clients paid you minus allowable business costs. If a client pays 3,000 and you spent 400 on software and equipment that month, you’re taxed on 2,600, not 3,000.
That’s why it pays to log expenses as they happen. Every cost you forget is a cost you pay tax on.
Step 2: choose your percentage
Your real tax rate depends on where you live, how much you earn, and which allowances you get. A few things to include:
- Income tax on your profit, after any tax-free allowance.
- Social contributions for the self-employed. In the US, self-employment tax is 15.3% on most of your net earnings, on top of income tax. Many other countries have their own equivalent.
- Local or regional taxes, where they apply.
If you don’t know the total yet, start at 30%. It’s far easier to release extra money later than to find money you’ve already spent. Once you’ve filed a year, divide the total you paid by your profit for that year. That’s your real rate.
Step 3: move the money the day you’re paid
Open a separate savings account and name it “Tax”. Each time a payment lands, move your percentage of the profit into it. Don’t wait until the end of the month. The point is never to see that money as spendable.
You can try different rates on any payment with the free tax set-aside calculator.
Step 4: add a savings buffer
Freelance income is uneven. A good month followed by two quiet ones is normal. Setting aside another 5–15% into a buffer account turns your income into something closer to a steady salary.
Worked example
| Amount | |
|---|---|
| Paid this month | 4,000 |
| Business costs | 500 |
| Profit | 3,500 |
| Tax set-aside at 30% | 1,050 |
| Buffer at 10% | 350 |
| Safe to pay yourself | 2,100 |
Notice that “safe to pay yourself” is just over half of what the client paid. That gap surprises most new freelancers, and it’s why pricing matters so much. See how to calculate your hourly rate.
Common mistakes
- Setting aside a percentage of income instead of profit. It’s safe but over-saves; fine if you prefer the cushion.
- Keeping the tax money in your main account. It will get spent.
- Forgetting advance payments in your second year.
- Not logging small expenses. They add up, and each one lowers your bill.
Do this automatically, all year
The tracker does this for every payment you receive and adds up your whole year automatically.
Get the tracker, $19 See what’s inside