Self-Employed Taxes Explained: What You Owe and How to Pay

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. Understanding how self-employed taxes work is essential for budgeting and avoiding penalties when quarterly payments are due.

The Two Tax Layers

Layer 1: Self-employment tax (SE tax)

Schedule SE generally starts with 92.35% of your net business profit to calculate net earnings from self-employment, then applies the combined 15.3% rate (12.4% Social Security plus 2.9% Medicare). For example, $70,000 of net profit produces about $64,645 of net earnings subject to this calculation before wage-base and other Schedule SE rules. The 92.35% step reflects the adjustment built into Schedule SE; it is why you should not multiply business profit directly by 15.3% to reproduce the tax.

The components are:

• 12.4% Social Security (on income up to the annual Social Security wage base, $184,500 in 2026)
• 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 business profit: $70,000; Schedule SE net earnings: $70,000 × 92.35% = $64,645

• SE tax (15.3% of $64,645): ~$9,891 ($64,645 × 15.3% = $9,890.69)
• SE tax deduction (50% of SE tax): −$4,945
• Federal taxable income: about $48,955 (after the half-SE-tax deduction and the $16,100 single standard deduction, before any QBI deduction)
• Federal income tax at 2026 rates (10% and 12% brackets): approximately $5,630
• Total federal tax burden: approximately $15,520 (about 22% of net income)

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

You generally need federal estimated tax payments only when both tests apply: you expect to owe at least $1,000 after withholding and refundable credits, and your withholding/credits will be less than the smaller of 90% of this year's tax or 100% of last year's tax (110% if last year's AGI exceeded $150,000, or $75,000 if married filing separately). See 2026 IRS Publication 505 and Form 1040-ES; the annualized-income method can reduce installments when income arrives unevenly. Withholding from a spouse's or day-job paycheck can count toward the federal total, but a business owner often needs to increase withholding or make payments. A separate state calculation is still required.

2026 estimated tax deadlines (approximate):

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.

When freelance income crosses state lines

The federal worksheet combines your income nationwide; state tax does not follow one nationwide “split the income by days” formula for every gig. Start with where you were a resident, where you physically performed the services, the state’s definition of sourced business income, and any special rule for the type of work. A client's billing address or the platform's headquarters does not by itself tell you where the work was performed. Some states use special rules for particular services, pass-through entities, or remote employees; do not transplant a W-2 employee's sourcing rule to Schedule C without checking.

If you were a resident of State A and physically performed part of your freelance work in State B, State B may require a nonresident return for its sourced share. State A may tax all of your income as a resident, then allow a credit for qualifying income tax paid to State B, subject to its own limits and sourcing rules. That credit may not eliminate double taxation dollar for dollar. Wage reciprocity agreements—where they exist—usually address employee withholding and should not be assumed to exempt a contractor's Schedule C income. Local income tax can add another layer.

Example (illustrative rates, not a state-return calculation): Jordan is a State A resident with $100,000 of net freelance profit in 2026. Work records show that $35,000 came from services physically performed in State B and $65,000 in State A. Assume—only to show the credit mechanics—that A taxes all resident income at a flat 5%, B taxes its $35,000 source share at a flat 4%, and A allows a full credit for B tax. B's illustrative tax is $1,400 ($35,000 × 4%). A first computes $5,000 on all $100,000, then the assumed $1,400 credit leaves $3,600 payable to A; total is $5,000. Real returns use each state's taxable-income base, rates, apportionment and credit limit, so this is not an actual return result. If the $35,000 were allocated only from the customer's address, or Jordan assumed the entire B payment automatically cancels A tax, the calculation could be wrong.

Execution checklist:

1. Keep a dated work log by service location, invoice, gross receipts, direct expenses, and business purpose. Separate where work occurred from where the customer lives.
2. Read each involved state's current resident and nonresident instructions to determine nexus, income sourcing, deductions, filing thresholds, and whether local returns are due.
3. Forecast federal income tax and self-employment tax on Form 1040-ES separately from each state's estimated income tax. Confirm whether a state uses different installment dates, annualization, or prior-year safe harbors.
4. Make separate payments to the IRS and each state using the right taxpayer/account and period. Keep confirmations and track payments by jurisdiction.
5. At filing, prepare the nonresident return first where practical, then use its final tax to calculate any resident-state credit; reconcile estimated payments and retain proof of work location.

The existing multi-state tax scenario calculator adds two user-entered income/rate scenarios. It does not decide source rules, residency, reciprocity, resident credits, thresholds, or progressive state tax; its combined total is not the amount to enter on a tax return.

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.

Sources

• IRS Self-employment tax: 15.3% rate and the half-SE-tax deduction.
• 2025 Schedule SE (Form 1040): line 4a applies 92.35% to net profit to calculate net earnings; the form and instructions are updated annually.
• Social Security Administration, 2026 COLA fact sheet: $184,500 Social Security wage base.
• IRS 2026 inflation adjustments: 2026 standard deduction and brackets.
• IRS Topic 306, Underpayment of estimated tax: safe harbor rules.
• IRS Publication 505 (2026): $1,000 and safe-harbor tests, the estimated-tax worksheet, and annualized installments.
• IRS Publication 509 (2026): calendar-year estimated payment due dates.
• IRS 2026 401(k) and IRA limits announcement: $24,500 deferral limit.
• IRS Notice 2025-67: $72,000 overall defined contribution limit.

Self-employment tax rates, deduction rules, and estimated tax deadlines change annually. Verify at IRS.gov.