How self-employment tax works
When you work for yourself, nobody withholds tax from your pay. You owe two things on your business profit: self-employment tax, which is Social Security and Medicare, and income tax, federal and usually state. Self-employment tax is 15.3% (12.4% Social Security plus 2.9% Medicare), figured on 92.35% of your net profit. Half of it is deducted before your income tax is worked out.
Worked example: $45,000 of profit
A one-person business clears $45,000 after expenses and mileage. The owner is in the 12% federal bracket and pays 5% state tax.
| Step | Amount |
|---|---|
| Self-employment tax: $45,000 × 92.35% × 15.3% | $6,358 |
| Income tax: ($45,000 − half of SE tax $3,179) × 17% | $7,110 |
| Set aside for the year | $13,468 |
| Share of profit | 30% |
| Each quarterly payment | $3,367 |
If expenses run about a quarter of income, that is roughly 22% of every payment that comes in. That is the simplest habit: move that share to a separate tax savings account the day a client pays.
Why "25% to 30%" is the usual rule of thumb
Self-employment tax alone is about 14% of profit. Add a 10% or 12% federal bracket and a few percent of state tax and you land between 25% and 30%. In the 22% or 24% bracket it is closer to 35% to 40%. The standard deduction and the QBI deduction bring the real bill down, which is why a set-aside estimate like this one usually leaves you a little extra.
Quarterly estimated tax
If you expect to owe $1,000 or more for the year, the IRS expects payments during the year, not just in April. The four due dates for a calendar year are April 15, June 15 and September 15, then January 15 of the next year. Paying a quarter of your estimate on each date is the simple way to avoid an underpayment penalty.
Frequently asked questions
How much should I set aside for taxes if I am self-employed?
Many people set aside 25% to 30% of profit. Use the calculator above for your own bracket and state.
How is self-employment tax calculated?
15.3% on 92.35% of net profit. On $45,000 that is about $6,358.
When are quarterly estimated taxes due?
April 15, June 15, September 15 and January 15 of the next year, moved to the next business day if a date falls on a weekend or holiday.
This is a planning tool, not tax advice. US federal rules; check with a tax professional. Nothing you enter leaves your browser.