The Short Answer

1. Start With Net Profit, Not the Consulting Deposit

Evan has been moving 25% of every consulting payment into a separate tax account.

That is 25% of gross receipts.

But his tax calculation does not simply apply a fixed percentage to the amount clients deposit into the bank.

Suppose a consultant receives:

$40,000 of consulting revenue

and has:

$5,000 of deductible business expenses.

The Schedule C net profit would generally begin around:

$35,000

not $40,000.

That does not mean reserving 25% of $40,000 is necessarily too much.

It could still be too little.

The point is that the percentage by itself does not answer the tax question.

IRS — Self-Employment Tax

The rest of Evan and Daisy’s return matters too.

Their wages.

Their withholding.

Investment income.

Deductions and credits.

And the taxes generated by Evan’s consulting profit.

That is why Arthur tells Evan:

“I’m looking at the whole return.”

2. Side Income Can Create Both Income Tax and Self-Employment Tax

Once Evan’s consulting activity is a trade or business, its net earnings can be subject to self-employment tax in addition to regular income tax.

The general self-employment tax rate is:

15.3%

consisting of:

12.4% Social Security tax

and

2.9% Medicare tax.

Generally, 92.35% of net self-employment earnings is used in calculating self-employment tax.

IRS — Self-Employment Tax

But even “15.3% self-employment tax” does not mean Evan should simply add 15.3 percentage points to his reserve rate.

Evan also has W-2 wages.

For 2024, the Social Security portion applied only until combined Social Security wages and applicable net self-employment earnings reached the annual wage base of:

$168,600

If Evan’s W-2 wages had already used part or all of that wage base, the remaining Social Security portion of his self-employment tax would be reduced accordingly.

Medicare tax does not have the same annual wage-base limit.

There can also be an additional 0.9% Medicare Tax when wages and self-employment income exceed the applicable filing-status threshold.

For married taxpayers filing jointly, that threshold is:

$250,000

IRS — Topic No. 560, Additional Medicare Tax

This is another reason a fixed percentage of consulting receipts cannot fully describe Evan’s tax situation.

3. A Tax Reserve and a Safe Harbor Answer Different Questions

This is the main distinction in Evan’s conversation with Arthur.

A tax reserve asks:

“How much cash should I keep available so I can pay the tax I eventually expect to owe?”

A safe-harbor calculation asks:

“How much tax generally needs to be paid during the year to avoid or reduce an estimated-tax underpayment penalty?”

Those are different targets.

Suppose Evan satisfies the prior-year safe harbor.

He may avoid a federal estimated-tax underpayment penalty.

But if his consulting income has grown substantially, he can still owe a meaningful balance when the return is filed.

A safe harbor is therefore not a prediction of the final tax bill.

It is a tax-prepayment rule.

That is why Arthur first wants enough tax paid during the year.

Then he separately asks how much cash Evan should reserve for the eventual tax bill.

IRS — Estimated Tax

4. How Does the Federal Safe Harbor Work?

For most individual taxpayers, federal estimated-tax rules generally become relevant when the taxpayer expects to owe at least:

$1,000

after withholding and applicable refundable credits,

and expected withholding and refundable credits will be less than the required annual payment.

That required annual payment is generally the smaller of:

90% of the current-year tax

or

100% of the prior-year tax.

For certain higher-income taxpayers, the prior-year percentage becomes:

110%

instead of 100%.

The higher-income rule generally applies when prior-year AGI exceeds:

$150,000

or $75,000 if married filing separately.

The prior-year safe harbor generally requires a prior-year return covering a full 12-month tax year.

IRS — Publication 505, Estimated Tax

Evan’s 2024 Rule

For Evan’s 2024 tax year, the comparison generally used:

90% of his 2024 tax

versus

100% of his 2023 tax,

or 110% of 2023 tax if the applicable higher-income rule applied.

The important word is:

smaller.

Evan generally does not need to satisfy both numbers.

And satisfying the safe harbor does not mean his final balance due will be zero.

5. Quarterly Estimated Payments Are Not Evan’s Only Option

Evan assumes that more consulting income automatically means he must start sending quarterly estimated payments.

Not necessarily.

Federal income tax uses a pay-as-you-go system.

Tax can be paid during the year through:

withholding,

estimated tax payments,

or a combination of both.

IRS — Publication 505

Because Evan has a W-2 job, he can submit a new Form W-4 and request more federal income tax withholding from his paycheck.

Form W-4 Step 4(c) allows an employee to request a specific additional dollar amount of federal income tax withholding from each paycheck.

It is not an instruction to add a separate withholding percentage.

IRS — Publication 505, Form W-4 Withholding

The IRS specifically notes that an employee who also has gig or side-business income may be able to avoid separate estimated payments by increasing withholding from the employee paycheck.

IRS — Manage Taxes for Your Gig Work

For someone like Evan, that can be simpler than making separate federal estimated-tax payments.

6. Withholding Has Another Planning Advantage

Withholding has an important feature for estimated-tax penalty purposes.

Federal income tax withheld during the year is generally treated as though one-fourth had been paid on each estimated-tax payment date, unless the taxpayer establishes the actual withholding dates.

IRS — Instructions for Form 2210

That can make additional W-2 withholding particularly useful when someone discovers later in the year that tax payments are running behind.

A late estimated-tax payment generally does not erase the period during which an earlier installment was underpaid.

Withholding can receive different treatment because of the way it is allocated across the payment periods.

That does not mean increasing withholding late in the year automatically cures every possible underpayment issue.

But it explains why Arthur’s suggestion is more than a matter of convenience.

For Evan, payroll withholding can be both simpler and useful for managing federal underpayment exposure.

7. What If the Consulting Income Grows Later in the Year?

Estimated-tax rules are designed around paying tax as income is earned.

That matters when income is uneven.

Evan’s consulting activity is growing.

His income during the second half of the year may be much larger than it was early in the year.

For federal estimated-tax purposes, the general payment dates are:

April 15

June 15

September 15

January 15 of the following year

If a due date falls on a Saturday, Sunday, or legal holiday, the payment is generally timely on the next business day.

IRS — Estimated Tax Payment Dates

That mattered in Evan’s 2024 tax year.

The general June 15 date fell on a Saturday, so the 2024 payment was due June 17.

The general September 15 date fell on a Sunday, so that payment was due September 16.

Despite the common phrase “quarterly estimated taxes,” these are not four equal calendar quarters.

If income arrives unevenly during the year, the annualized income installment method may allow the required installments to better reflect when the income was actually earned.

IRS — Publication 505, Annualized Income Installment Method

That can matter for a side business that becomes much busier only during part of the year.

8. California Requires a Separate Calculation

Arthur tells Evan:

“And California?”

“Separate calculation.”

That is important.

California estimated-tax rules resemble the federal rules in some ways, but they are not identical.

For Evan’s 2024 tax year, California generally required estimated payments when the expected California balance after withholding and credits was at least:

$500

or $250 for married/RDP filing separately,

and withholding and credits were expected to be less than the applicable required amount.

California generally used the smaller of:

90% of current-year California tax

or

100% of prior-year California tax.

For taxpayers whose prior-year California AGI exceeded $150,000, or $75,000 for married/RDP filing separately, the prior-year percentage generally increased to:

110%

Taxpayers with current-year California AGI of $1,000,000 or more, or $500,000 for married/RDP filing separately, generally cannot use the prior-year safe harbor and instead must base the calculation on current-year tax.

California FTB — 2024 Form 540-ES Instructions

California also does not use the federal-style 25%-per-installment pattern.

Its regular installment percentages are generally:

First installment
→ 30%

Second installment
→ 40%

Third installment
→ 0%

Fourth installment
→ 30%

For 2026, that basic structure remains in place.

California FTB — 2026 Form 540-ES Instructions

Special rules and exceptions apply in some circumstances, including farming and fishing situations, but those are not part of Evan’s facts.

Evan may also be able to increase California income-tax withholding through his paycheck rather than relying only on separate California estimated payments.

California withholding is adjusted through Form DE 4, which is separate from the federal Form W-4.

That is why Evan should not simply copy his federal payment calculation and assume California works the same way.

9. So How Much Should Evan Actually Set Aside?

There is no universal percentage.

Twenty percent is not automatically right.

Twenty-five percent is not automatically right.

Thirty percent is not automatically safe.

A better process is to start with projected consulting revenue and deductible business expenses.

Then estimate net business profit.

Next, estimate self-employment tax after considering Evan’s W-2 wages and the Social Security wage base.

Then incorporate the consulting profit into the household’s projected federal and California tax returns.

After that, subtract expected withholding, credits, and estimated payments.

Finally, separate two targets:

the amount of tax that should be paid during the year,

and

the amount of cash Evan should keep reserved for the eventual balance.

That is the calculation Evan had skipped.

His 25% transfer rule can still be useful after the projection.

It just should not replace the projection.

10. What Changed Between 2024 and 2026?

The basic federal estimated-tax framework did not materially change.

The general $1,000 threshold and the 90% current-year / 100% or 110% prior-year framework remain in place for 2026.

IRS — Publication 505

The general self-employment tax rate also remains:

15.3%

But the Social Security wage base changes each year.

2024
→ $168,600

2026
→ $184,500

The Medicare portion continues without the same wage-base ceiling.

IRS — Publication 15, 2026 Social Security Wage Base

The 0.9% Additional Medicare Tax thresholds remain:

MFJ
→ $250,000

MFS
→ $125,000

Other filing statuses
→ $200,000

IRS — Topic No. 560

California’s general estimated-tax framework also remains substantially similar in 2026, including the higher-income rules and the 30% / 40% / 0% / 30% installment pattern.

California FTB — 2026 Form 540-ES Instructions

So unlike the solar credit in the previous Guide, EP-06 does not require a major current-law reversal.

The numbers still need to be checked each year.

The planning framework remains the same.

Common Mistakes

“Saving 25% of every payment means my taxes are covered.”

Not necessarily. A reserve percentage is a cash-management rule, not a tax calculation.

“Self-employment tax is always exactly 15.3% of my Schedule C profit.”

Not exactly. The general calculation uses 92.35% of net self-employment earnings, and W-2 wages can affect how much of the Social Security portion remains applicable.

“If I meet a safe harbor, I will not owe anything when I file.”

No. A safe harbor generally addresses estimated-tax underpayment exposure. It does not guarantee that the final tax balance will be zero.

“If I have side-business income, I must make quarterly estimated payments.”

Not necessarily. A W-2 employee may be able to increase paycheck withholding instead.

“Form W-4 lets me add whatever extra withholding percentage I want.”

Step 4(c) generally asks for an additional dollar amount to withhold from each paycheck.

“Quarterly estimated taxes mean four equal calendar quarters.”

Not exactly. Federal estimated-tax payment periods are uneven, even though there are generally four payment dates.

“Federal and California estimated taxes work the same way.”

No. California has its own thresholds, higher-income rules, and installment percentages.

The Key Distinction

Evan needs to track three different numbers.

1. Net consulting profit tells him what part of the business activity feeds into his tax calculation.
2. Required tax payments tell him how much generally needs to be paid during the year through withholding and/or estimated payments to manage underpayment exposure.
3. The tax reserve tells him how much cash he wants available for the final tax liability that may remain.

A percentage can help Evan save.

A projection tells him what the percentage is supposed to cover.

Reference

Federal Estimated Tax and Withholding

IRS — Publication 505, Tax Withholding and Estimated Tax
Current IRS guidance on federal withholding, estimated tax, safe-harbor calculations, Form W-4 adjustments, payment dates, and the annualized income installment method.
IRS — Publication 505

IRS — Estimated Tax
Current IRS guidance on who may need estimated-tax payments, federal payment dates, and the pay-as-you-go system.
IRS — Estimated Tax

IRS — Manage Taxes for Your Gig Work
IRS guidance explaining that employees with side or gig income may increase W-2 withholding instead of making separate estimated-tax payments.
IRS — Manage Taxes for Your Gig Work

IRS — Instructions for Form 2210
IRS guidance on the underpayment calculation, including the general treatment of federal withholding as paid across the estimated-tax payment dates.
IRS — Instructions for Form 2210

Self-Employment Tax

IRS — Self-Employment Tax: Social Security and Medicare Taxes
IRS guidance on the 15.3% self-employment tax rate, net earnings from self-employment, and coordination with Social Security wages.
IRS — Self-Employment Tax

IRS — Topic No. 560, Additional Medicare Tax
Current IRS guidance on the additional 0.9% Medicare Tax and its filing-status thresholds.
IRS — Topic No. 560

IRS — Publication 15, Employer’s Tax Guide
Current IRS guidance confirming the 2026 Social Security wage base of $184,500 and Medicare tax rates.
IRS — Publication 15

California Estimated Tax

California FTB — 2024 Form 540-ES Instructions
Historical FTB guidance supporting the California estimated-tax rules applicable to Evan’s 2024 story year.
California FTB — 2024 Form 540-ES Instructions

California FTB — 2026 Form 540-ES Instructions
Current California guidance on estimated-tax thresholds, higher-income rules, the $1 million current-year limitation, and the 30% / 40% / 0% / 30% installment schedule.
California FTB — 2026 Form 540-ES Instructions

California FTB — Estimated Tax Payments
Current FTB overview of California estimated-tax calculations and payment methods.
California FTB — Estimated Tax Payments

See This Rule in the Story

Episode 06 — The Number Evan Wasn’t Watching

Evan has a system.

Every consulting payment arrives, and 25% immediately moves into an account labeled TAX.

The system works—until Arthur asks what the 25% is actually based on.

Evan then learns that saving enough cash for taxes, paying enough during the year to manage an underpayment problem, and calculating the final tax bill are three different questions.

READ EPISODE 06 →

Related Tax Guide

Side Hustle Income: When Does It Become a Business?

Before deciding how much tax to reserve, Evan first had to determine what his consulting activity had become for federal tax purposes.

This Guide explains when side income can become a Schedule C trade or business and when self-employment tax enters the picture.

READ THE TAX GUIDE →