How much of your side income should you set aside for taxes?
For most people with a regular job and a side business, the answer is somewhere between 25% and 40% of the profit you make on the side. The exact figure depends on your federal tax bracket and whether your state taxes income. This guide shows how the number is built so you can work out your own.
Tax is owed on profit, not on what customers pay you
Side income is taxed on your net profit: what you were paid minus the business expenses you can deduct, such as software, supplies, fees, and the business share of mileage or a phone bill. If you earn $24,000 and have $4,000 of legitimate expenses, your profit is $20,000, and that is the number the rest of this guide uses. Keeping simple records of both income and expenses is the single most useful habit, because every deductible dollar lowers all three layers of tax described below.
The three layers of tax on side income
Side income from freelancing, gig work, or a small business is typically taxed three times over, by three different calculations.
1. Self-employment tax
When you work for an employer, the employer pays half of your Social Security and Medicare tax. When you work for yourself, you pay both halves. The rate is 15.3%, applied to 92.35% of your net profit, which works out to about 14.1% of profit. It applies once you have $400 or more of net self-employment earnings. There is a full breakdown in our self-employment tax guide.
2. Federal income tax
Your profit is added on top of your day-job wages, so it is taxed at your top (marginal) federal bracket, not at your average rate. If your wages put you in the 22% bracket, most of your side profit is taxed at 22%. You do get to deduct half of your self-employment tax before income tax is figured, which trims the bill slightly.
3. State income tax
Most states tax side income as ordinary income, at rates that run from under 3% to above 10%. A handful of states have no income tax on wages or business profit. See the state income tax guide for how to find your rate.
Three worked examples
Each example assumes $20,000 of side-income profit for 2026, single filing status, and the calculator's simplified method: your chosen bracket applies to all profit after the deduction for half of self-employment tax.
| Scenario | Self-employment tax | Federal income tax | State tax | Total | Share of profit |
|---|---|---|---|---|---|
| 12% bracket, no state tax, $40,000 wages | $2,826 | $2,230 | $0 | $5,056 | 25.3% |
| 22% bracket, 5% state tax, $65,000 wages | $2,826 | $4,089 | $1,000 | $7,915 | 39.6% |
| 24% bracket, 6% state tax, $120,000 wages | $2,826 | $4,461 | $1,200 | $8,487 | 42.4% |
The self-employment tax is the same in each row because the Social Security wage base for 2026 is $184,500 and none of these wages come close to it. What changes is the income tax. That is why the common range is 25% to 40%, and why someone in a higher bracket in a state with income tax can land a little above it.
A rule of thumb many freelancers use: set aside about 25% to 30% of profit if you are in a low bracket with no state income tax, and 35% to 40% if you are in a higher bracket or a state that taxes income. If you set aside slightly too much, the difference comes back as a refund or lower balance due when you file.
Why the amount feels higher than people expect
Employees never see self-employment tax as a separate line, because payroll takes it out before the paycheck arrives. Side income arrives with nothing withheld, so the full 14.1% shows up at once, on top of income tax. A first-time freelancer who budgets only for income tax will usually be short by roughly that amount.
How to actually set the money aside
- Open a separate savings account just for taxes. Keeping it apart from spending money makes it much harder to dip into by accident.
- Move your percentage every time you get paid, not once a year. If your number is 30%, transfer $30 of every $100 as it lands.
- Pay quarterly if you expect to owe $1,000 or more for the year. The quarterly estimated tax guide covers the 2026 dates and how to pay.
- Settle up when you file. Anything left in the account after your return is filed is yours to keep.
Things that can lower the bill
- Deductible business expenses. They reduce profit, which reduces all three taxes at once.
- The qualified business income deduction. Many self-employed people can deduct up to 20% of qualified business income, subject to income limits and other rules. The calculator leaves it off by default so the estimate stays cautious; you can switch it on to see the effect.
- Retirement contributions. Self-employed retirement accounts such as a SEP IRA or Solo 401(k) can reduce taxable income. Rules and limits are specific, so ask a tax professional before relying on them.
- Increasing your day-job withholding. Some people raise the withholding on their regular paycheck instead of making quarterly payments. That is covered in the quarterly payments guide.
What this estimate leaves out
These figures are a planning tool. They do not model credits, other income, the phase-outs on the qualified business income deduction, or the way a large amount of side income can push part of it into the next bracket. If your situation involves any of those, treat the estimate as a starting point and have a licensed tax professional review it.
Run the numbers with the free calculator
Sources
This guide is general information, not tax advice. Tax rules change and individual circumstances differ.