Two taxes on the same profit
An employee has tax taken out of every paycheck. When you work for yourself, nobody does that for you, and you owe two separate taxes on your business profit:
- Self-employment tax: Social Security and Medicare, 15.3% on 92.35% of net profit. That is about 14.1% of profit, whatever your income bracket.
- Income tax: federal, plus state in most states, on your profit minus half of the self-employment tax.
Profit means what is left after business expenses and mileage, not what clients paid you. That is why clean books matter: every receipt you log lowers the number the tax is figured on.
Worked examples
| Net profit | Federal + state rate | SE tax | Income tax | Set aside | Share |
|---|---|---|---|---|---|
| $30,000 | 10% + 5% | $4,239 | $4,182 | $8,421 | 28% |
| $45,000 | 12% + 5% | $6,358 | $7,110 | $13,468 | 30% |
| $60,000 | 12% + 5% | $8,478 | $9,479 | $17,957 | 30% |
| $80,000 | 22% + 5% | $11,304 | $20,074 | $31,378 | 39% |
These are set-aside amounts, not tax bills. They leave out the standard deduction and the qualified business income (QBI) deduction, which usually lower what you actually owe. Setting aside a little too much is the point: the extra comes back to you, a shortfall comes with a penalty. Run your own numbers with the free self-employment tax calculator.
Turn it into one habit: a share of every payment
The set-aside share is of profit, but money arrives as payments from clients, before expenses. If your expenses are about a quarter of what you bring in, 30% of profit is roughly 22% of each payment. Pick the number, open a separate savings account for tax, and move that share the day a client pays. Then the quarterly payment is a transfer, not a scramble.
Quarterly due dates
| Income earned | Payment due |
|---|---|
| January 1 to March 31 | April 15 |
| April 1 to May 31 | June 15 |
| June 1 to August 31 | September 15 |
| September 1 to December 31 | January 15 of the next year |
The periods are not equal quarters: the second one is two months and the last one is four. If a due date falls on a weekend or holiday, it moves to the next business day. If you expect to owe $1,000 or more for the year, the IRS expects these payments; paying a quarter of your estimate on each date is the simple way to stay clear of the underpayment penalty.
Common mistakes
- Setting aside a share of profit but counting it from income. Or the reverse. Decide which one your percentage is based on.
- Forgetting self-employment tax. In the 12% bracket it is the bigger of the two taxes.
- Spending the tax money in a slow month. Keep it in a separate account you do not use for anything else.
- Not logging mileage and small receipts. At a 30% set-aside, every $100 of missed expenses costs you about $30.
This is general information, not tax advice. Rules and rates change; check with a tax professional for your situation.
