Bottom line: Self-employed individuals pay self-employment (SE) tax of 15.3% on net income (covering both sides of Social Security and Medicare) plus federal and state income tax. Set aside 25-35% of every payment you receive. Pay quarterly estimated taxes to avoid underpayment penalties: they are due in April, June, September, and January.
When you work for an employer, they pay half of your Social Security and Medicare taxes (7.65%) and withhold the other half from your paycheck. When you are self-employed, you pay both halves yourself: the self-employment tax, on top of regular income tax. This is the primary tax surprise for new freelancers and contractors.
The Two Tax Layers
Layer 1: Self-employment tax (SE tax)
15.3% of net self-employment income, broken down as:
- 12.4% Social Security (on income up to the annual Social Security wage base; verify the current-year figure at ssa.gov)
- 2.9% Medicare (on all net self-employment income)
- An additional 0.9% Medicare surtax applies above $200,000 (single) or $250,000 (married)
You can deduct half the SE tax from your gross income (an "above-the-line" deduction), which reduces your taxable income.
Layer 2: Federal (and state) income tax
Calculated on net profit from self-employment, minus the SE tax deduction and other deductions. The same marginal tax brackets apply to self-employment income as to W-2 income.
Combined example:
Net self-employment income: $70,000
- SE tax (15.3%): ~$9,890
- SE tax deduction (50% of SE tax): −$4,945
- Federal taxable income: ~$65,055 (after standard deduction)
- Federal income tax at 22% marginal rate: approximately $9,300
- Total federal tax burden: approximately $19,190 (~27% effective rate)
For a first-year freelancer expecting this to be closer to their W-2 tax burden, the difference is a significant surprise.
Quarterly Estimated Taxes
The IRS requires taxpayers who expect to owe more than $1,000 in taxes (after withholding) to make estimated tax payments four times per year. Missing or underpaying these triggers an underpayment penalty.
2026 estimated tax deadlines (approximate):
- For income earned
- January 1 – March 31
- Due date
- April 15
- For income earned
- April 1 – May 31
- Due date
- June 15
- For income earned
- June 1 – August 31
- Due date
- September 15
- For income earned
- September 1 – December 31
- Due date
- January 15 (next year)
How much to pay: The "safe harbor" rules protect you from underpayment penalties if you pay either:
- 100% of last year's tax liability (110% if AGI exceeded $150,000 last year), or
- 90% of this year's actual tax liability
For most self-employed people with variable income, paying 100% of last year's tax in four equal installments is the simplest safe-harbor approach.
Pay through IRS Direct Pay (irs.gov/payments) or EFTPS (Electronic Federal Tax Payment System). State estimated taxes are paid separately.
- Set aside 25–30% of every client payment into a separate savings account earmarked for taxes. This prevents the common situation of spending the tax money and scrambling at April 15.
- The QBI deduction (Section 199A) allows many self-employed individuals to deduct up to 20% of qualified business income. Income limits apply and phase-outs affect some professions (lawyers, consultants, financial advisors in certain structures). Worth calculating if you have significant self-employment income.
- Self-employed individuals can contribute to a SEP-IRA (up to 25% of net self-employment income, subject to an annual IRS dollar cap) or a Solo 401(k) (an employee deferral plus a 25% employer contribution, also subject to an annual cap). These are among the best tax-reduction tools available to the self-employed; verify current-year contribution limits at irs.gov.
Self-Employment Tax Deductions
Legitimate business expenses reduce your net self-employment income, lowering both SE tax and income tax. Common deductions on Schedule C:
- Home office: If you use part of your home exclusively and regularly for business, you can deduct a portion of rent/mortgage and utilities. The simplified method deducts $5 per square foot (up to 300 sq ft = $1,500).
- Business equipment: Computers, cameras, software, tools. Fully deductible in the year purchased (Section 179) or depreciated over time.
- Vehicle use: Business miles at the IRS standard mileage rate, which is set annually and published at irs.gov. Keep a mileage log.
- Health insurance premiums: Self-employed individuals can deduct 100% of health insurance premiums for themselves and family as an above-the-line deduction.
- Professional services: Accountant, attorney, business consultant fees.
- Marketing and advertising: Website, business cards, ads.
- Education: Courses, books, or training directly related to maintaining or improving existing business skills.
How to File
Self-employment income is reported on Schedule C (Profit or Loss from Business), attached to your Form 1040. SE tax is calculated on Schedule SE. You pay the resulting tax at filing time (minus quarterly payments already made).
First-time self-employed filers should seriously consider using a CPA or enrolled agent for the initial year to ensure all deductions are captured and estimated payment obligations are set up correctly.
Self-employment tax rates, deduction rules, and estimated tax deadlines change annually. Verify at IRS.gov.
Frequently Asked Questions
How much should I set aside for self-employment taxes?
What is the self-employment tax rate?
When are quarterly estimated taxes due?
Can I deduct half of my self-employment tax?
What is the safe harbor rule for estimated taxes?
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