The 30% Rule: Why You Should Set Aside This Much for Taxes
It's April 15th. Your accountant just told you that you owe $45,000 in taxes. You have $8,000 in your bank account. This is the nightmare scenario that keeps self-employed professionals up at night—and it's completely avoidable with one simple rule.
The 30% Rule
The simple formula for tax-time peace of mind
Set aside 30% of every dollar you earn into a separate tax savings account.
This covers federal taxes, state taxes, and self-employment tax for most consultants earning $75K-$250K.
Why 30%? Breaking Down the Math
When you're self-employed, you're not just paying income tax—you're facing a three-headed tax monster that employees never see. The first blow comes from self-employment tax, a brutal 15.3% that covers both the employer and employee portions of Social Security and Medicare. When you're a W-2 employee, your company quietly pays half of this for you. As a consultant, you pay the full freight.
But that's just the appetizer. On top of self-employment tax, you're still on the hook for regular federal income tax. Most consultants earning between $75,000 and $250,000 find themselves in the 22-24% marginal bracket—and that's before we even talk about state taxes. If you're in California or New York, add another 6-13% to the pile. Even "tax-friendly" states like Colorado still take their 4-5% cut.
Do the math: 15% self-employment tax + 12-15% effective federal tax + 4-8% average state tax = 31-38% total effective rate for most consultants. We say 30% because it's a round number that works for most situations, and it's better to slightly over-save than come up short in April.
Self-Employment Tax
15.3%
Social Security (12.4%) + Medicare (2.9%)
This hits you first, before income tax
Federal Income Tax
10-24%
Depends on your income bracket
Most consultants fall in the 22-24% range
State Income Tax
0-13%
Varies by state
California/NY highest, FL/TX have none
Example Calculation
Real-World Example: Sarah the Consultant
Sarah is a marketing consultant earning $150,000 per year. She lives in Colorado (4.4% state tax).
❌ Without the 30% Rule
Annual income: $150,000
Spent throughout the year: $150,000
Tax bill in April: $43,500
Money available: $0
Result: Panic, payment plans, penalties
✅ With the 30% Rule
Annual income: $150,000
Set aside 30%: $45,000
Available to spend: $105,000
Tax bill in April: $43,500
Tax savings balance: $45,000
Result: Paid in full, $1,500 cushion
How to Implement the 30% Rule
The mechanics are simple, but execution requires discipline. Most consultants who fail at this don't have a system problem—they have a psychology problem. Watching money sit in an account without touching it is harder than it sounds when cash flow is lumpy and expenses are constant. Here's how to make it automatic and painless.
Open a Separate Savings Account
The cardinal sin is keeping tax money in your operating account. It feels like you have more cash than you actually do, and you'll inevitably spend it. Open a dedicated high-yield savings account—literally label it "Tax Savings" so there's no confusion. Banks like Marcus, Ally, or American Express offer 4-5% interest right now, which means your tax money can earn $2,000+ per year while waiting for the IRS. That's found money.
Pro tip: Look for accounts offering 4-5% interest. Your tax money can earn interest while waiting!
Transfer 30% Every Time You Get Paid
This is where discipline meets automation. The moment a $10,000 client payment hits your account, $3,000 goes straight to tax savings—no exceptions, no delays. The longer that money sits in your checking account, the more likely you'll find a "reason" to use it. Treat this transfer like a non-negotiable business expense, because that's exactly what it is. You can do this manually, but I've seen too many consultants forget or "borrow" from their tax savings. Automation removes the temptation entirely.
Manual Method
Set a reminder to transfer after each payment
Automated Method
Use tools like QuickBooks or Relay to automate
Make Quarterly Estimated Payments
The IRS doesn't wait until April to collect—they expect quarterly payments throughout the year. Miss these deadlines and you'll face underpayment penalties even if you pay the full amount in April. Your tax savings account funds these quarterly payments (due April 15, June 15, September 15, and January 15). Start with 100% of last year's total tax bill divided by four, or use the safe harbor method: pay 110% of last year's tax if you earned over $150,000, or 100% if under. This protects you from penalties even if your income spikes mid-year.
2026 Quarterly Deadlines
Q1
Apr 15
Q2
Jun 15
Q3
Sep 15
Q4
Jan 15
Never Touch the Tax Account
Pretend this money doesn't exist. It's not your money—it's the government's money that you're temporarily holding.
Should You Adjust the 30% Rule?
The 30% rule is a starting point, not gospel. Think of it as the baseline that works for a consultant earning $100,000-$150,000 in a moderate-tax state like Colorado or Georgia. But your situation might call for adjustments.
If you're in California, New York, or New Jersey, you're looking at state taxes in the 6-13% range—significantly higher than the national average. In these states, bump your savings rate to 35-40%. The pain of over-saving by $5,000 is nothing compared to the panic of owing $15,000 you don't have. High earners above $200,000 face even steeper marginal rates and additional Medicare tax (0.9%), pushing some consultants into the 40-45% effective range.
On the flip side, if you're in Texas, Florida, or Washington—states with zero income tax—you can drop to 25%. And if you're aggressively maximizing deductions through a Solo 401(k) ($69,000 max in 2025), HSA ($8,550 for families), and home office expenses, your effective rate could fall to 20-25%. The key is to review your actual tax return from last year: divide your total tax by your gross income to find your effective rate, then add 5% as a buffer. That's your personalized savings percentage.
Save More Than 30% If:
- ▲You live in a high-tax state (CA, NY, NJ)
- ▲You earn over $200K annually
- ▲You have limited business deductions
- ▲You want a larger cushion/refund
Consider 35-40% for these situations
You Might Save Less If:
- ▼You live in a no-tax state (FL, TX, WA)
- ▼You max out retirement contributions
- ▼You have an S-Corp with reasonable salary
- ▼You have significant business expenses
You might get away with 25%, but start at 30%
Common Mistakes to Avoid
Thinking "I'll Save Later"
The money will be gone. Save it immediately, before you spend it.
Dipping Into Your Tax Savings
"I'll just borrow $5K and pay it back next month" never works out.
Not Adjusting for Major Changes
If you move states or change your business structure, recalculate your percentage.
Forgetting Quarterly Payments
Missing quarterly deadlines can result in penalties, even if you pay the full amount in April.
The Peace of Mind Factor
Beyond avoiding tax-time panic, the 30% rule provides psychological benefits:
You sleep better
No 3 AM anxiety about owing thousands you don't have
You spend with confidence
Know your real take-home amount and budget accordingly
No surprises in April
Tax season becomes a non-event, not a crisis
Potential tax refund
If you overpaid, you get a nice refund in April
Key Takeaways
- 1.Set aside 30% of every payment you receive
- 2.Keep tax savings in a separate account you never touch
- 3.Make quarterly estimated tax payments to avoid penalties
- 4.Adjust the percentage based on your state and situation
- 5.This simple rule prevents tax-time panic and saves thousands in penalties