Freelancer tax set-aside: what goes into the number, and how to track it

Nobody can tell you the right percentage without knowing your income, deductions and where you live. What a spreadsheet can do is make sure whatever rate you choose actually gets moved aside, quarter by quarter.

This article is about US federal rules as described on irs.gov, for general information only. It is not tax advice and it does not tell you what you owe. If you live elsewhere, your rules differ. Check the linked IRS pages and ask a qualified professional about your situation.

What the money has to cover

For a US self-employed person, a set-aside usually needs to cover three things:

1. Income tax on your profit, which depends on your total income, filing status and deductions. This is the part no template can know for you.
2. Self-employment tax. The IRS states that "the self-employment tax rate is 15.3%," made up of 12.4% for social security and 2.9% for Medicare, and that it applies when your net earnings from self-employment were $400 or more. The social security part only applies up to an annual earnings limit that changes each year, and you can deduct the employer-equivalent portion of the tax when figuring adjusted gross income. Source: IRS, Self-Employment Tax.
3. State and local tax, if any, which varies widely.

Why it's quarterly, not once a year

The IRS says self-employed individuals "generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed," that the year is divided into four payment periods, and that individuals use Form 1040-ES. It also describes penalty-avoidance rules: you avoid the penalty if you owe less than $1,000 after withholding and credits, or if you paid at least 90% of the current year's tax or 100% of the prior year's tax shown on the return, whichever is smaller. Sources: IRS, Estimated Taxes and Form 1040-ES (due dates are listed there; check the current year's).

The practical lesson: a tax bill that arrives as four chunks is easier to survive if you've been setting money aside every month rather than discovering it at filing time.

A spreadsheet that does the tracking

You need your profit per quarter and one cell for your chosen rate. With income and expenses by quarter in rows 6 and 7:

Net profit           =B6-B7
Suggested set-aside  =MAX(0, B8) * $B$1     ' B1 = the rate you chose
Already set aside    (you type it)
Still to set aside   =MAX(0, B9-B10)

Two design choices matter. First, MAX(0, ...) stops a loss quarter from producing a negative set-aside; if you want a loss to reduce the full-year figure, calculate the year's total instead of per quarter. Second, keep the rate in a single labelled cell, flagged as your own assumption, so changing your mind is a one-cell edit.

Choosing the rate

A reasonable approach is to start with a placeholder, move that share of every payment into a separate savings account as it arrives, then true it up with a qualified professional or after your first filing. Having the money separated matters more than getting the percentage perfect on day one. Whatever you pick, write down where it came from.