A small business owner recently shared a familiar frustration: they were advised to reserve 45% of their income for taxes and ended up owing far more than expected. What seemed like sound advice felt more like a trap. The root of the problem? A critical misunderstanding between revenue (income) and profit.
Let’s unpack the difference and explore how to manage taxes more strategically.
Revenue vs. Profit: It Matters
The first big revelation comes from smart commenters explaining:
- Revenue (gross income) is the total amount you bring in, i.e. all the money from sales.
- Profit is what remains after subtracting business expenses from revenue.
If your LLC earned $36,000 in revenue and your expenses were $22,000, your taxable profit is only $14,000—not $36,000. So setting aside 43% of profit (≈$6,000) is very different from planning on 43% of total revenue (≈$15,000).
What Went Wrong?
What followed next made things clearer:
- The CPA likely meant “reserve 45% of profit” — not all revenue.
- A 45% tax rate on profit isn’t uncommon when combining federal, state, and self-employment taxes.
- But without clarity, this advice caused unnecessary alarm and financial strain.
Key Lessons and Best Practices
If you find yourself in the same spot, here’s how to correct course:
1. Clarify Terminology
Always double-check whether your advisor is referring to revenue, profit, or taxable income. A simple miscommunication can change everything.
2. Run Monthly Profit Forecasts
This helps you understand your net income over time — not just at year-end. It also ensures you’re saving appropriately and avoids surprises come tax season.
3. Keep Meticulous Expense Records
Equipment, mileage, travel — all add up. Document receipts and use the right categories so nothing slips through the cracks.
4. Reevaluate Your Tax Structure
An LLC taxed as an S-Corp may help reduce self-employment tax by enabling you to pay yourself a reasonable salary and take the remainder as distributions. However, S-Corp benefits often become worthwhile only when profit exceeds around $50,000 due to added administrative costs.
5. Work with a Proactive Tax Advisor
Your accountant should review your tax position quarterly, not just at year-end. If a tax-heavy return grosses you out, it may be time to look for someone who prioritizes planning and clarity year-round.
Final Takeaway
If you’ve been told to “reserve 45% of your income” for taxes, pause and ask: do you mean your profit or your total revenue?
Digging into your books, tracking your profit consistently, and planning ahead can help you keep more of what you’ve earned without compromising compliance.