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TAXES Self-Employment Taxes: What Freelancers and Contract... 2026-02-27 · 5 min read · self-employment tax · freelancer taxes · 1099 taxes

Self-Employment Taxes: What Freelancers and Contractors Need to Know

taxes 2026-02-27 · 5 min read self-employment tax freelancer taxes 1099 taxes quarterly estimated taxes self-employed

The biggest financial shock most new freelancers and contractors experience isn't irregular income — it's the tax bill at the end of the year. Unlike employees, who have taxes automatically withheld from each paycheck, self-employed people owe both their income taxes AND the full self-employment tax themselves.

The Self-Employment Tax

When you work for an employer, the FICA taxes (Social Security and Medicare) are split:

When you're self-employed, you pay both sides: 15.3% of your net self-employment income.

Breakdown:

On $60,000 in net self-employment income, self-employment tax is approximately $8,478.

The Good News: Half Is Deductible

You can deduct 50% of your self-employment tax as an above-the-line deduction on your income taxes. This partially offsets the burden but doesn't eliminate it.

What "Net Self-Employment Income" Means

Self-employment tax applies to your profit, not gross revenue. If you earned $80,000 in freelance income and had $20,000 in legitimate business expenses, your net self-employment income is $60,000, and SE tax is calculated on that amount.

This makes tracking business expenses critically important.

Quarterly Estimated Taxes

If you expect to owe at least $1,000 in taxes, the IRS requires you to pay taxes quarterly, not just at year-end.

Due dates (generally):

Missing these payments results in underpayment penalties — even if you pay everything owed by April 15. The penalty is small (roughly 8% annually, prorated), but avoidable.

How to Calculate Quarterly Payments

Safe harbor method (recommended for most): Pay 100% of last year's tax liability in equal quarterly installments. If you owed $12,000 last year, pay $3,000 per quarter this year. You avoid penalties regardless of how much you actually owe this year. (Higher earners — over $150,000 AGI — need to pay 110% of prior year.)

Current year estimate method: Estimate this year's income and expenses, calculate the tax, and pay quarterly. More complex but can reduce cash flow drain in a low-income year.

Pay estimated taxes at IRS.gov/payments using Direct Pay, EFTPS, or mail.

Setting Aside Tax Money

The most practical approach: set aside 25-30% of every payment you receive into a dedicated savings account earmarked for taxes. Don't touch it. When quarterly payment time comes, use that account.

This approach prevents the common trap of spending money that wasn't really yours.

For a rough quick estimate: add your income tax rate to the self-employment tax rate. If you're in the 22% federal bracket plus 15.3% SE tax (minus the SE deduction), a 30% reserve is a reasonable starting point. State income taxes add to this.

Business Expense Deductions

Self-employed people can deduct all "ordinary and necessary" business expenses. These directly reduce both your income tax AND your self-employment tax.

Common deductible expenses:

Track everything: Keep receipts and a record of the business purpose. Use accounting software (Wave is free; QuickBooks Self-Employed and FreshBooks are popular paid options).

Retirement Accounts for the Self-Employed

The self-employed have access to retirement accounts with contribution limits far higher than W-2 employees:

SEP-IRA (Simplified Employee Pension)

Solo 401(k) (Individual 401k)

Contributing significantly to retirement accounts is one of the most powerful tax reduction strategies for the self-employed.

Health Insurance Deduction

Self-employed individuals can deduct 100% of health, dental, and vision insurance premiums paid for themselves, their spouse, and their dependents.

This is an above-the-line deduction — not subject to the 7.5% AGI threshold that limits most medical deductions for W-2 employees.

The QBI Deduction (Qualified Business Income)

Since 2018, most self-employed individuals can deduct 20% of their qualified business income (QBI) if their taxable income is below $191,950 (single) or $383,900 (married) in 2024.

This effectively reduces the income tax rate on self-employment income substantially. For someone in the 22% bracket, the QBI deduction brings the effective rate on business income down to about 17.6%.

The rules are complex for higher earners, certain professional services, and businesses with employees. A tax professional can optimize this.

S-Corp Strategy for Higher Earners

Once your net self-employment income consistently exceeds $40,000-$50,000/year, electing S-corporation status can reduce self-employment taxes.

With an S-corp, you split income between a "reasonable salary" (subject to payroll taxes) and distributions (not subject to SE tax). This can save $5,000-$15,000/year in SE taxes at higher income levels.

The trade-off: additional administrative complexity (separate payroll, annual corporate filing). Usually not worth it below $50,000-$60,000 in consistent net income.

Common Self-Employment Tax Mistakes

Not paying quarterly: Procrastinating quarterly payments means a large unexpected bill in April — and penalties.

Not tracking mileage: If you use your car for business, track every mile. At 67 cents/mile (2024 IRS rate), 10,000 business miles = $6,700 in deductions.

Missing the home office deduction: Even a small dedicated workspace qualifies. Calculate it accurately — it can be $1,000-$4,000/year in deductions.

Not contributing to retirement accounts: SEP-IRA and Solo 401k contributions are the most powerful legal tax reduction available to the self-employed. Starting a SEP-IRA can be done on April 15 of the following year and still count for the prior year.

Mixing personal and business finances: Keep a separate business checking account and credit card. This makes expense tracking accurate and clean, and protects you if audited.

First year of self-employment is hardest — the tax bill shock is real. Build the habits early and the subsequent years become manageable.