How Much to Set Aside for Taxes: A 2026 Guide for Plumbers, Roofers, and HVAC Contractors

If you are trying to figure out how much to set aside for taxes as a contractor, the answer is 25% to 30% of your net business income. That is the planning target our office uses with plumbers, roofers, HVAC techs, and other trades who come through our door. It covers self-employment tax plus federal income tax and state income tax in one number. The percentage always applies to net profit — what is left after materials, subcontractors, and job costs — never to what you invoice. This contractor tax planning guide breaks down each piece so you know exactly where the money goes.

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

Our standing advice to trade contractors: sweep 25 to 30 cents of every net dollar into a separate tax account the day you take the draw. In a state with no income tax, 25% is enough. In California, use 30% to cover the state's income tax brackets. If you are having an unusually profitable year — net profit well above where you normally land — push it to 35% or higher. The extra cushion protects you from landing in a higher bracket without realizing it.

This is a planning target, not an official IRS figure. The actual percentage depends on your income level, filing status, state, and deductions. But 25% to 30% of net is the range that consistently works because it is built from the real components: self-employment tax, federal income tax, and state tax. Break those apart and you can see exactly why the number lands where it does.

How does self-employment tax work in 2026?

Self-employment tax runs 15.3% on your net earnings. That rate holds up to the 2026 Social Security wage base of $184,500 — the income line where Social Security tax stops. Above that line, only the 2.9% Medicare portion applies. The 2026 wage base figure comes from the Social Security Administration's 2026 fact sheet.

For a contractor with $100,000 in net profit, the full SE tax rate applies because you are well under the wage base. The calculation starts with your net profit and applies a 92.35% factor. That factor accounts for the employer half you are allowed to deduct. Your net SE earnings come to $92,350. The SE tax on that is roughly $14,130.

SE tax is the floor of your set-aside. Even if your income tax bill drops to zero after deductions, you still owe SE tax on every dollar of net profit. You can read the full mechanics in our self-employment tax guide for contractors.

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

Federal income tax stacks on top of SE tax, and it is the piece that varies most by your filing status and deductions. Three deductions pull your taxable income down before the brackets apply. First, half your SE tax comes off the top. That deduction is built into the tax code to give self-employed people the same employer-half break that W-2 workers get automatically. Second, you get the standard deduction. Third, the QBI deduction shields 20% of your business profit from income tax.

After those three deductions, your taxable income lands well below your net profit. The federal tax brackets apply to that reduced figure, not to your full $100,000. The income tax that results is real, but it is smaller than most contractors expect because three layers of deductions have already come off the top.

Add that income tax to your SE tax and you arrive at the 25% set-aside target. In a no-income-tax state, that target gives you a comfortable buffer above your actual federal bill. The buffer matters because the exact number shifts with your filing status, your other income, and how many deductions you can claim. Every legitimate write-off available to contractors pulls that effective rate down further.

Should I set aside taxes on gross or net income?

Always set aside based on net business income, never on gross. Net income is what is left after materials, subcontractors, direct job costs, and ordinary business expenses. You only pay tax on profit. If you invoice $150,000 on jobs but spend $60,000 on materials and subs, your net is $90,000. The 25% to 30% set-aside applies to that $90,000 figure.

Contractors who set aside a percentage of gross almost always over-reserve, which ties up cash they could use to grow the business. Contractors who set aside nothing until tax time almost always under-reserve and end up on a payment plan. The net-income method is the one that actually matches your tax bill.

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

In California, push the set-aside to 30% of net. The state charges income tax at multiple bracket levels, and those brackets reach meaningful rates quickly for most working contractors. California also has additional payroll taxes that apply to your earnings. The combined effect of state taxes adds enough on top of your federal bill that the 30% target is the right cushion.

In a state with no income tax — Texas, Florida, Nevada, Washington, and several others — the 25% target covers you. In states with moderate income tax rates, split the difference between 25% and 30%. The point is to match the set-aside to the actual tax burden your state creates.

What is the safe harbor for quarterly estimated taxes?

The safe harbor is straightforward under IRC §6654. You avoid the underpayment penalty if your payments during the year hit the lesser of 90% of this year's total tax or 100% of last year's total tax. If your AGI was over $150,000 on last year's return, the prior-year safe harbor jumps to 110% of last year's tax. There is also a de minimis rule: if you owe less than $1,000 at filing, no penalty applies.

For a contractor whose income is rising, the prior-year safe harbor locks in your protection. Say you owed $18,000 in total tax last year and your AGI was under $150,000. If you pay in at least $18,000 during the current year through quarterly estimates and withholding, you are safe — even if your actual tax bill turns out to be much higher. You will still owe the balance at filing, but no penalty attaches.

For a contractor whose income is falling, the current-year safe harbor is the better target. Pay in 90% of what you will actually owe and you avoid the penalty without overpaying. The trick is estimating accurately, which is where the 25% to 30% set-aside comes in. Our quarterly tax payment guide for contractors walks through the deadlines and the mechanics of each payment.

When it is time to send the payment, use EFTPS. It gives you a confirmation number and a paper trail, which matters if the IRS ever questions whether you paid on time.

Does my business entity change how much I set aside?

Yes — and the difference can be significant once your net profit is high enough. A sole proprietor or single-member LLC taxed as a sole proprietorship pays self-employment tax on the entire net profit. A multi-member LLC taxed as a partnership also passes the full SE tax through to the active partners. These are pass-through entities, but the SE tax still hits every dollar of your share.

An S-Corp changes the math. You pay yourself a W-2 salary and take the rest as distributions. The salary portion is subject to Social Security and Medicare through payroll. The distributions are not subject to SE tax at all. That split can save thousands per year in self-employment tax.

In our experience representing contractors in audits, a salary of roughly one-third of net profit is the level that consistently holds up as reasonable compensation. The remaining two-thirds flows as distributions free of SE tax. Take $120,000 of net profit as an example. The target W-2 salary is roughly $40,000 — one-third of net. The remaining $80,000 flows as distributions. The SE tax savings on those distributions is about $12,240.

Our threshold: when net profit clears $80,000 to $100,000 and looks repeatable, it is time to run the S-Corp math. Below that level, payroll costs, state franchise taxes, and extra tax-prep fees eat the savings. The full comparison is in our LLC vs S-Corp guide for contractors.

If you do elect S-Corp status, your set-aside percentage can drop because a portion of your profit is no longer subject to SE tax. A contractor in a no-income-tax state with an S-Corp might set aside 20% to 22% of net instead of 25%. But you also have payroll taxes on the W-2 wages to account for, so the total cash outflow is not as simple as just lowering the percentage. Run the numbers for your specific situation.

Can retirement contributions lower my tax set-aside?

Yes. Contributing to a SEP-IRA or a Solo 401(k) reduces your taxable income dollar for dollar. That lowers both your income tax and, in the case of a Solo 401(k) elective deferral, your SE tax. The exact contribution limits depend on the plan type and your age, but the principle is simple: every dollar you put into a qualified retirement account is a dollar the tax brackets do not see.

A contractor who maxes out a retirement contribution can lower their set-aside percentage accordingly. The trade-off is that the cash is locked in the retirement account until you reach retirement age. Our SEP-IRA vs Solo 401(k) comparison for contractors lays out which plan fits which situation.

What happens if I do not set aside enough?

The consequence is the underpayment penalty under IRC §6654. The penalty runs like interest on the shortfall — it is not a flat fine, and it is not catastrophic. The IRS calculates it based on the amount you should have paid each quarter, applied at a rate the IRS sets periodically. For most contractors the dollar amount is modest — often a few hundred dollars on a year where you were slightly short.

The more practical problem is the tax bill itself. If you set aside nothing during the year and owe $25,000 at filing, you have to come up with that cash all at once. For a contractor whose cash flow ebbs and flows with job cycles, coming up with $25,000 in April is the real cost — not the penalty, but the scramble to pay the balance. Setting aside 25% to 30% of net as you go avoids both problems.

A note on audits, since contractors sometimes worry that a shortfall triggers extra scrutiny. In FY2025 the IRS closed 497,621 audits against roughly 180 million returns, according to the IRS compliance-presence data. Most IRS contact is a mail-based mismatch letter — the kind that clean 1099 and W-2 records prevent. An underpayment is not an audit trigger. It is a balance-due item with a straightforward penalty calculation.

Figuring out how much to set aside for taxes comes down to three components: self-employment tax at 15.3% on your net earnings up to the $184,500 wage base, federal income tax on top of that after deductions, and state income tax if your state charges one. The 25% to 30% of net target covers all three in most contractor situations. If you want a second set of eyes on your specific numbers — your entity, your state, your income level — book a meeting with our office and we will walk through it together.