If you earn $400 or more in net self-employment income during the year, you owe federal taxes on it, and you’re responsible for paying those taxes yourself. Unlike a traditional employee whose employer withholds taxes from each paycheck, you need to calculate what you owe and send payments directly to the IRS, typically four times a year. Here’s how the entire process works, from figuring out what you owe to actually making payments.
What You Owe: Two Separate Taxes
Self-employed workers pay two distinct federal taxes on their earnings. The first is regular income tax, which applies to your net profit at whatever bracket your total income falls into. The second is self-employment tax, which covers Social Security and Medicare. The combined self-employment tax rate is 15.3%: 12.4% for Social Security (up to the annual wage base) and 2.9% for Medicare on all net earnings. If you earn above $200,000 as a single filer ($250,000 married filing jointly), an additional 0.9% Medicare surtax applies to earnings above that threshold.
When you work for an employer, you and your employer each pay half of Social Security and Medicare taxes. As a self-employed person, you pay both halves. The silver lining is that you can deduct half of your self-employment tax when calculating your adjusted gross income, which lowers your income tax bill.
Estimated Tax Payments: The Quarterly Schedule
Because no employer is withholding taxes for you, the IRS expects you to pay as you earn throughout the year by making quarterly estimated tax payments. These cover both your income tax and self-employment tax. The four deadlines are:
- April 15 for income earned January 1 through March 31
- June 15 for income earned April 1 through May 31
- September 15 for income earned June 1 through August 31
- January 15 of the following year for income earned September 1 through December 31
If a due date falls on a weekend or federal holiday, the deadline shifts to the next business day. You can make payments online through IRS Direct Pay (directly from a bank account, no fees), the Electronic Federal Tax Payment System (EFTPS), or by credit/debit card (which carries a processing fee). You can also mail a check with a Form 1040-ES payment voucher.
How to Calculate Each Payment
The simplest approach is to estimate your total annual income, subtract your expected deductions, then calculate both your income tax and self-employment tax on the result. Divide that total by four, and that’s roughly what you send each quarter. The IRS provides Form 1040-ES with a worksheet to walk you through this calculation.
If your income fluctuates, which is common for freelancers and seasonal businesses, you have two practical strategies. The first is to base payments on last year’s total tax liability divided by four. This is straightforward and keeps you in safe harbor territory (more on that below). The second is the annualized income installment method, where you calculate tax on the actual income earned during each quarter’s period. This is more work but avoids overpaying during slow months.
A common rule of thumb is to set aside 25% to 30% of every payment you receive into a separate savings account earmarked for taxes. This keeps the money available when quarterly deadlines arrive.
Avoiding Underpayment Penalties
If you don’t pay enough throughout the year, the IRS charges an underpayment penalty. You can avoid it by meeting any one of these conditions:
- You owe less than $1,000 when you file your annual return.
- You paid at least 90% of your current year’s total tax liability through estimated payments.
- You paid 100% of last year’s tax liability across your four quarterly payments. If your adjusted gross income was above $150,000 ($75,000 for married filing separately), this threshold rises to 110% of last year’s tax.
The 100% (or 110%) of last year’s tax rule is the easiest safe harbor to use because it gives you a fixed number to aim for. Even if your income jumps significantly, you won’t face a penalty as long as you hit that target through your quarterly payments. You’ll still owe the balance when you file, but without the penalty added on.
Forms You Need to File
At tax time, your self-employment income flows through several forms that attach to your regular Form 1040:
- Schedule C (Profit or Loss from Business) is where you report your gross income and subtract your business expenses to arrive at net profit. This is the core document for your self-employment income.
- Schedule SE (Self-Employment Tax) calculates your Social Security and Medicare tax based on the net profit from Schedule C.
- Form 1040-ES is the worksheet and payment voucher set you use throughout the year to calculate and send your quarterly estimated payments. You don’t file this with your return; it’s a tool for making payments during the year.
If you received $600 or more from any single client, they should send you a 1099-NEC form reporting that income. You’re required to report all self-employment income even if you don’t receive a 1099 for it.
Deductions That Lower Your Bill
Business expenses reduce your net profit on Schedule C, which lowers both your income tax and your self-employment tax. Keep records and receipts for everything you spend on your business. The most impactful deductions for most self-employed workers include:
Half of self-employment tax. You deduct 50% of your SE tax directly from your adjusted gross income. This happens automatically when you complete your return.
Home office. If you use part of your home exclusively and regularly for business, you can deduct a portion of your housing costs (rent or mortgage interest, utilities, insurance) proportional to the space used. There’s also a simplified method: $5 per square foot of office space, up to a maximum of $1,500.
Health insurance premiums. If you’re not eligible for coverage through a spouse’s employer, you can deduct 100% of the premiums you pay for health, dental, and vision insurance for yourself and your family.
Vehicle expenses. You can deduct actual vehicle expenses (gas, maintenance, insurance) proportional to business use, or use the standard mileage rate of $0.70 per mile. Keep a mileage log either way.
Retirement contributions. Contributions to a SEP-IRA, Solo 401(k), or SIMPLE IRA are fully deductible. These plans let you shelter a significant portion of your income from taxes while building retirement savings.
Qualified business income deduction. Many self-employed workers can deduct up to 20% of their qualified business income. This deduction has income limits and restrictions for certain service-based businesses, so the amount you qualify for depends on your specific situation.
Other commonly overlooked deductions include software and subscriptions you use for work, internet and phone bills (the business-use percentage), office supplies, professional development courses, advertising costs, business insurance premiums, and bank fees on your business account. Even business meals are 50% deductible when you’re meeting with a client or traveling for work.
Keeping Records Throughout the Year
Good recordkeeping makes everything easier. Open a separate bank account for your business income and expenses so your finances aren’t tangled with personal spending. Track every business expense as it happens rather than trying to reconstruct a year’s worth of spending in April.
Accounting software designed for freelancers and small businesses can categorize expenses automatically, estimate your quarterly tax payments, and generate the reports you need at filing time. At minimum, save receipts for any expense over $75 and keep a running log of mileage if you drive for business. The IRS can audit self-employment returns for up to three years after filing (six years if income is substantially understated), so hold onto your records for at least that long.
What the Process Looks Like Start to Finish
When you first start earning self-employment income, the steps are straightforward. Estimate your annual income, use the Form 1040-ES worksheet to figure your quarterly payment amount, and send your first payment by the next quarterly deadline. Set aside a percentage of each payment you receive so the cash is ready.
Throughout the year, track your income and expenses and make your four quarterly payments on time. After the year ends, complete Schedule C to calculate your profit, Schedule SE to calculate your self-employment tax, and file everything with your Form 1040 by the April 15 filing deadline. If your estimated payments fell short, you’ll owe the difference. If you overpaid, you’ll get a refund or can apply the excess to next year’s estimated payments.