How to set aside money for taxes

by Dale Davidson March 18, 2026

As a 1099, you have to pay your own taxes instead of having it automatically withdrawn from your paycheck.

I have used two methods to set aside money for taxes.

My original method was to just set aside 30-35% of each payment I received in a separate checking account and then make a payment close to or equal to the amount in the checking account to the IRS and Virginia's tax authority.

This worked fine for the most part and is a good method to use. You'll reduce the likelihood of underpaying your taxes and having to write an extra check of the government.

My current method is to

Estimate my income for the entire year (my own personal revenue from billing hours plus profit from employees)
Estimate the amount of taxes I owe for the year (My accountant does this but you can use this Keeper 1099 tax calculator)
Set up an automatic monthly transfer for the pro-rated monthly amount of taxes I estimate I owe from my primary checking account to my "tax" checking account. So if I think I'll owe $120,000 for the year in taxes, I set up a monthly transfer of $10,000 from my personal checking account to my business acount.
I then make the same tax payment each quarter e.g. $30,000 if total estimated tax obligation is $120,000
If I think my income will be substantially different then what I originally estimated I calculate a new number and adjust the transfer amounts accordingly

The weakness in this approach is that if you got your income estimate wrong, your payments will be off. The worst case is when you substantially underestimated your taxes and you have to write a big fat check to the IRS but you already spent the money.

I like the second approach currently because it allows for better planning and consistency. I just make sure I have enough of a buffer in my personal checking account to make sure the auto-transfers go through.

It's also a useful exercise to estimate what you'd make in a year. Easy if you're a solo 1099 with a year long gig, tougher when you have variable hours and employees and such. But going through the exercise helps you think about your business, how many hours you'd like to work or need to work, etc.

Neither is wrong and the first method is the more conservative approach. BUT if you like more planning and consistency with your taxes and "take home" pay, the second method does a good job of allowing for that.

Want the full playbook? Check out Going 1099.