Work, pay & shifts
Setting Aside Taxes as a Freelancer
No employer withholds tax from freelance income, so part of every payment belongs to the tax authorities before you see it. Setting a rate from the take-home pay you want means grossing it up for tax first — and the obvious way to do that is wrong. This guide covers the arithmetic and some practical habits. It is not tax advice: what you actually owe depends on where you live and how your business is set up.
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Gross up by dividing, not multiplying
To take home $60,000 after setting aside 25%, you need $60,000 ÷ (1 − 25%) = $80,000 before tax: 25% of $80,000 is $20,000, leaving $60,000. Adding 25% instead — $60,000 × 1.25 = $75,000 — leaves only $56,250 after the 25% set-aside, $3,750 short.
Different set-aside rates
Income needed before tax for $60,000 of take-home pay:
| Set-aside rate | Income before tax | Set aside |
|---|---|---|
| 20% | $75,000.00 | $15,000.00 |
| 25% | $80,000.00 | $20,000.00 |
| 30% | $85,714.29 | $25,714.29 |
| 35% | $92,307.69 | $32,307.69 |
Choosing a set-aside rate
- Income tax, plus any self-employment or social-insurance contributions where you live, plus local taxes.
- Last year’s effective rate — total tax ÷ profit — is a reasonable starting point.
- An accountant can estimate it for your situation; when in doubt, set aside a little more.
- A single rate is a simplification. Real taxes have brackets, allowances, and deductions this arithmetic ignores.
Putting the money aside
- Open a separate account just for tax.
- Move your set-aside percentage of each client payment into it when the payment arrives.
- Pay any estimated or advance tax installments your jurisdiction requires from that account.
- Compare the balance with your actual tax bill each year and adjust the percentage.
Freelance Tax Set-Aside FAQ
- What percentage should freelancers set aside for taxes?
- There isn’t one figure that fits everyone. It depends on your income, your expenses, where you live, and your business structure — an accountant or last year’s return is the best guide.
- Is the set-aside on revenue or profit?
- Tax is usually on profit — revenue less allowable expenses. The Freelance Hourly Rate Calculator applies the set-aside to your income goal, after expenses.
- Does a profit buffer get taxed too?
- If it ends up as profit, usually yes. The calculator doesn’t add tax on the buffer, so the buffer slightly overstates what you keep.
- Why not just add the tax percentage to my income?
- Because tax is taken from the larger, pre-tax amount. Adding 25% to $60,000 gives $75,000, and setting 25% of that aside leaves $56,250, not $60,000.
- Is this the same as estimated tax payments?
- No. The set-aside is money you keep ready; estimated or advance payments are what you actually pay, when your tax authority requires them.
Related guides
- Freelance Hourly RateThe freelance hourly rate formula, a step-by-step example, why dividing by 2,080 hours underprices you, and how billable hours change the minimum rate.
- Freelance ExpensesThe business costs a freelance rate has to cover that an employer used to pay: an example $12,000 budget, what each line adds per billable hour, and how to spread big purchases.
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