Tax Essentials for New and Growing Self-Employed Professionals

by Sarah Thompson · February 11, 2026

Starting and running a business as a freelancer, independent contractor, or small-business owner comes with freedom, flexibility, and — unavoidably — taxes. For many people the burden of self-employed taxes feels confusing at first. This article walks through what self-employment tax is, how it fits with income tax, which forms and deadlines matter, common deductions, business entities, bookkeeping best practices, and practical, year-round steps to reduce surprises and penalties.

What is self-employment tax and how does it work?

Self-employment tax is the term used to describe the Social Security and Medicare taxes that self-employed individuals must pay on net earnings from self-employment. For employees, payroll taxes are split between worker and employer; self-employed people pay both halves themselves. Understanding how self-employment tax interacts with ordinary federal income tax is the first step toward compliance and planning.

The self-employment tax rate explained

The combined self-employment tax rate is 15.3 percent, which breaks down into 12.4 percent for Social Security and 2.9 percent for Medicare. A small additional Medicare surtax of 0.9 percent may apply to high earners above certain thresholds when calculating income tax, though the 0.9 percent surtax is not part of Schedule SE and is handled on Form 1040.

How to calculate self-employment tax

Self-employment tax is applied to net business income. The IRS allows an adjustment where you multiply your net profit by 92.35 percent to arrive at the amount subject to SE tax (this accounts for the “employer” portion of the payroll tax that you are considered to provide to yourself). You then apply the 15.3 percent SE tax rate to that adjusted amount, and half of the self-employment tax is deductible on Form 1040 as an adjustment to income.

Example quick calculation:

Gross business revenue: 80,000
Business expenses: 30,000
Net business income: 50,000
92.35% of 50,000 = 46,175
Self-employment tax = 46,175 x 15.3% ≈ 7,067
Deductible half = 7,067 / 2 ≈ 3,534 (above-the-line deduction on Form 1040)

Estimated taxes: why and how to pay quarterly

Because taxes are not withheld from 1099 and other self-employed income, you typically must pay estimated taxes quarterly. These payments cover both income tax and self-employment tax. Use Form 1040-ES to calculate and pay estimated taxes online (IRS Direct Pay, EFTPS, or through tax software) or by mail.

Quarterly estimated tax deadlines explained

1st quarter: April 15
2nd quarter: June 15
3rd quarter: September 15
4th quarter: January 15 of the following year

If a deadline falls on a weekend or holiday, the payment is due the next business day. If you miss making timely estimated payments you may owe underpayment penalties and interest.

Safe harbor rules and how to avoid penalties

The IRS safe harbor rules let you avoid underpayment penalties if you pay either 100 percent of the prior year’s tax (110 percent if your adjusted gross income exceeded a threshold) or 90 percent of the current year’s tax. For many freelancers, relying on the prior year method is a practical way to avoid surprises.

How to estimate payments accurately

Estimating future tax liability requires forecasting income and factoring in deductible expenses, retirement contributions, and business credits. Track income and expenses monthly and update your estimated tax calculation midyear if your revenue changes substantially. Using monthly or quarterly bookkeeping makes this far less painful.

Income types and information forms to know

Self-employed earnings can come in many forms: direct payments, platform-based earnings reported on 1099-K, or contract work reported on 1099-NEC. Knowing which forms you should expect and how to report cash payments is essential.

1099-NEC, 1099-K, and W-9 explained

Form 1099-NEC: Issued by clients to report nonemployee compensation of 600 or more paid during the tax year. Freelancers should collect a W-9 from new clients so payers have the correct information to issue 1099s.
Form 1099-K: Payment processors and platforms issue 1099-K for certain transaction thresholds. Reporting thresholds have changed over years and can differ by state; check current thresholds and platform reporting rules.
Form W-9: You provide this to clients so they can issue correct 1099 forms. It collects your legal name, business name (if any), EIN or SSN, and tax classification.

All income is taxable whether reported on a 1099 or not. The IRS matches third-party reporting (1099/1098/1095, etc.) to tax returns, so keep your records robust and report all income including cash.

Understanding business income and deductions

Gross business income is the total you receive from business activities before subtracting expenses. Net business income — the figure that matters for taxes — is gross income minus allowable business expenses and cost of goods sold (COGS).

Common deductible business expenses explained

Deductible business expenses reduce your taxable net income when they are ordinary and necessary for your trade or business. Common deductions include:

Home office deduction (simplified or actual methods)
Vehicle expenses (mileage vs actual expense)
Office supplies, equipment, and software
Advertising and marketing costs
Professional services, bookkeeping, and tax prep
Education and training relating to the business
Travel and meal expenses (subject to rules)
Business insurance and licenses
Retirement contributions for the self-employed

What you can and cannot deduct — myths and realities

There are many myths about write-offs. A key reality is that deductions must be ordinary and necessary and must be backed by documentation. Personal expenses, fines and penalties, and lavish or extravagant expenses that lack a business purpose are not deductible. You cannot deduct personal commuting costs to a steady job location or household expenses unrelated to business use.

Home office deduction explained

The home office deduction is available if a portion of your home is used regularly and exclusively for business. Two methods exist:

Simplified method: a standard deduction based on square footage (up to a limit).
Actual expense method: prorates mortgage interest, utilities, repairs, and depreciation based on percentage of home used for business.

Choose the method that yields the larger deduction, but keep careful records of space measurements and expenses. The “exclusive” requirement means the space must be used solely for business (exceptions are narrow).

Mileage vs actual vehicle expense explained

Two choices exist when deducting vehicle costs: the standard mileage rate or actual expenses. Use the standard mileage rate by multiplying business miles driven by the IRS standard mileage rate for the year. Alternatively, track total vehicle expenses (gas, repairs, insurance, depreciation) and multiply by the business-use percentage. Pick the method that yields the larger deduction; note that switching methods later for depreciation has rules.

Retirement and health deductions to lower taxable income

Saving for retirement through self-employed retirement plans gives tax benefits while helping build long-term wealth. Health insurance premiums for self-employed taxpayers are often deductible as an adjustment to income.

Self-employed retirement plans explained

Popular options include:

SEP IRA: Simple to set up, allows employer contributions up to a percentage of net earnings; good for high-earning freelancers with variable cash flow.
Solo 401(k): Designed for owner-only businesses; permits higher combined employee deferral and employer contribution limits than SEP in many cases, and allows Roth options.
SIMPLE IRA: Easier and cheaper to administer than some plans, with lower contribution limits than Solo 401(k) or SEP.

Choosing the right plan depends on income, desire for employee contributions, and expected growth. Contributions can reduce taxable income and are powerful tools for long-term tax planning.

Health insurance deduction for the self-employed explained

If you are self-employed and not eligible for employer-subsidized health insurance, you may be able to deduct your health insurance premiums for yourself, spouse, and dependents. This is an above-the-line deduction that lowers adjusted gross income, but eligibility rules and limitations apply based on net profit and whether you have coverage available through a spouse’s employer.

Entities and tax implications: sole proprietor, LLC, S corp, and C corp

Entity choice affects liability, administration, and taxes. Many freelancers start as sole proprietors (or single-member LLCs taxed as disregarded entities) and later consider electing S-corp status when profits become substantial enough to justify additional administrative burden.

Sole proprietor and single-member LLC taxes explained

By default, a sole proprietor or single-member LLC reports business income and expenses on Schedule C attached to Form 1040. Net profit flows to your individual return and is subject to both income tax and self-employment tax.

S corporation taxes and payroll considerations

An S corporation is a pass-through entity for tax purposes. Owners typically take a reasonable salary (which is subject to payroll taxes) and may take distributions that are not subject to self-employment tax. The potential tax advantage comes from reducing the amount subject to SE tax, but the IRS requires a reasonable salary and S corps involve payroll setup, quarterly payroll tax filings, and more paperwork.

Reasonable salary explained

Reasonable salary means compensation that would be typical for someone performing similar services in the industry. The IRS scrutinizes S-corp owners who pay artificially low salaries to avoid payroll taxes. When evaluating reasonableness, consider time worked, duties, and comparable market rates.

When to consider S-corp election

If your business consistently generates net profits that would produce significant self-employment tax, consider S-corp status once the tax savings justify the extra accounting and payroll costs. Many advisors suggest considering S-corp status when net profits exceed a threshold where payroll and administrative costs are outweighed by SE tax savings — often in the range of 40,000 to 70,000 in net profit, but this varies by situation.

C corporation and double taxation explained

C corporations pay corporate income tax, and shareholders pay tax again on dividends (double taxation). For many small businesses, pass-through entities are preferred for tax simplicity unless there are reasons to retain profits at the corporate level or pursue specific tax planning strategies.

Bookkeeping, record-keeping, and audit preparedness

Good bookkeeping is the foundation of tax compliance and better decision-making. It minimizes audit risk, ensures accurate estimated tax payments, and supports deductions with documentation.

Accounting methods explained: cash vs accrual

Most small service businesses use the cash method, recognizing income when received and expenses when paid. Accrual accounting recognizes income when earned and expenses when incurred. The choice affects timing of income recognition and deductions; discuss with a tax pro if you sell inventory or expect big timing differences.

Receipts, documentation, and what to keep

Keep receipts, invoices, bank statements, and proof of payment for at least three years, though some experts recommend seven years for added safety. For deductions tied to travel, meals, and vehicle use, include business purpose, date, and mileage or cost documentation. Scan and back up records in the cloud to reduce risk of loss.

How to reduce audit risk

Audit risk rises when reported numbers deviate from norms for similar taxpayers, when you report large losses repeatedly, or when claiming home office or large business expense deductions without documentation. Prevent issues by filing accurate returns, keeping detailed records, and avoiding aggressive deduction positions without substantiation.

Industry-specific considerations and platform income

Online sellers, gig economy workers, content creators, and digital product vendors face particular tax nuances. For example, marketplaces may issue 1099-K for transaction volume, while clients may issue 1099-NEC for services. Sales tax must be considered for goods and certain services, and economic nexus rules mean you may owe sales tax in states where you have significant sales.

Sales tax vs income tax explained

Sales tax is collected from customers on sales of taxable goods or services and remitted to state and local authorities. Income tax applies to your profits after expenses. Collecting sales tax doesn’t make the tax your expense, but failing to collect and remit when required can create liabilities and penalties.

Crypto, digital products, and platform reporting

Crypto received as payment is taxable at fair market value at receipt; subsequent appreciation may trigger capital gains on disposition. Digital products and subscriptions can have unique nexus and sales tax rules depending on states and product types. Keep clear records of platform fees and gross receipts for accurate reporting.

Tax planning strategies to lower your tax bills

Effective tax planning starts early in the year and evolves with your business. The goal is not simply to minimize taxes this year but to coordinate decisions that support business growth and long-term wealth.

Year-round tax planning explained

Monthly bookkeeping, quarterly estimated tax checks, and reviewing compensation and entity elections annually keeps you on track. Consider accelerating deductible expenses into the current year if you expect higher income next year, or deferring income when appropriate. Use retirement contributions and health insurance deductions to reduce AGI.

Strategies for reducing self-employment tax

Elect S-corp status when appropriate and pay a reasonable salary while taking distributions for remaining profits.
Maximize pre-tax retirement contributions (Solo 401(k), SEP IRA).
Use legitimate business expenses to reduce net self-employment income.

Each strategy has tradeoffs and compliance requirements; consult a tax professional before making entity or payroll changes.

Handling taxes when you hire or scale

Growing your business by hiring employees or contractors changes payroll, withholding, and reporting obligations. Understand payroll taxes, worker classification rules, and the paperwork that comes with adding people to your team.

Independent contractor vs employee explained

Misclassifying workers can result in payroll tax liabilities and penalties. The IRS and Department of Labor look at behavioral control, financial control, and relationship type to determine classification. Treat contractors as contractors only if they meet tests for independence and you refrain from controlling their day-to-day work.

Payroll taxes and running payroll

If you have employees, you must withhold federal and state income taxes, collect Social Security and Medicare, and pay the employer portion of payroll taxes. You will file quarterly payroll tax returns and issue W-2s at year end. Consider payroll services to simplify compliance and reduce errors.

Tax problems and relief options

If you fall behind on taxes, options exist: installment agreements, offers in compromise in select situations, or temporary deferments. Respond quickly to IRS notices, and consider hiring a CPA or enrolled agent if you receive a CP2000 notice or other audit- or collection-related correspondence.

Late filing vs late payment — penalties and interest explained

Filing late without extension triggers a failure-to-file penalty that is typically larger than the failure-to-pay penalty. If you need more time to file, submit Form 4868 to request an extension to file (not to pay). Even with an extension to file, you should estimate and pay any taxes owed to avoid late payment penalties and interest.

Practical year-one checklist for a newly self-employed person

Decide on a business name and whether to register an LLC or operate as a sole proprietor. Obtain an EIN if needed.
Open a business bank account and use a dedicated credit card for business transactions to separate personal and business finances.
Set up simple bookkeeping using software that integrates with your bank and invoicing (examples include QuickBooks, FreshBooks, or Wave).
Collect W-9s from clients and store 1099s when issued.
Estimate quarterly taxes and pay Form 1040-ES payments on time.
Track all business expenses carefully with receipts and a digital backup plan.
Decide on health insurance and retirement plan options early in the year to capture maximum deductions.

When to hire a tax professional

Do-it-yourself tax software works well for many but complex situations benefit from professional advice. Consider hiring a CPA or enrolled agent when:

Your net business income grows substantially.
You are considering entity changes like S-corp election.
You receive an IRS notice, audit, or CP2000.
You have multiple states, foreign income, or complex sales tax obligations.

CPAs can offer broader financial planning, while enrolled agents specialize in tax representation. Choose a practitioner with experience in small-business and self-employed tax issues.

Smart habits that make tax time easier

Monthly close and financial review

Close your books monthly: reconcile bank and credit card accounts, categorize expenses, and check profitability. Regular reviews reveal whether you should adjust estimated tax payments and help you identify areas to cut costs or invest for growth.

Document business purpose and keep contemporaneous notes

For travel, entertainment, and client meeting expenses, contemporaneous notes about the who, what, and why provide strong support at tax time or in an audit. Use a phone app to photograph receipts and store them with transaction records.

Special topics: net operating losses, depreciation, and QBI

If your business generates a loss, net operating loss (NOL) rules determine how losses offset income in other years. Recent tax law changes adjusted NOL carryback and carryforward rules; review current IRS guidance or consult a pro for exact treatment.

Depreciation, Section 179, and bonus depreciation explained

Capital purchases such as computers, furniture, and equipment generally must be capitalized and depreciated over their useful life, though Section 179 allows immediate expensing of qualifying business property up to limits, and bonus depreciation permits additional first-year deductions for eligible property. These rules let you accelerate deductions in the year of purchase when it makes sense for tax planning and cash flow.

Qualified Business Income (QBI) deduction

The QBI deduction can reduce taxable income for many pass-through business owners by up to 20 percent of qualified business income, subject to income thresholds and service business limitations. Calculating QBI can be complex due to limitations based on W-2 wages and qualified property; plan early and capture documentation of wages and distributions for accurate computation.

Final practical tips and resources

Taxes for the self-employed are manageable with steady record-keeping, an understanding of key forms and deadlines, and periodic review of entity and retirement choices. Use reputable tax software to file and pay, and consider a quarterly check-in with an accountant during peak growth years. Keep an eye on state filing obligations when you sell goods, deliver services across state lines, or have nexus due to physical presence or economic thresholds.

Small steps compound: a good bookkeeping routine, a separate business account, retirement contributions, and timely estimated payments will reduce stress and improve cash flow. Build a checklist for year-end tasks: reconcile accounts, collect missing 1099s, run a profit-and-loss report, estimate next year’s tax liability, and set up any retirement plan contributions before deadlines. With planning and the right support, self-employment taxes become less of a burden and more a part of your growth strategy, letting you focus on delivering value to clients and scaling your business sustainably.

Ultimately, treating taxes as an ongoing business expense to be managed rather than a once-a-year chore changes how you run your business. Start with the basics: accurate records, estimated payments, and smart use of available deductions and retirement vehicles. Those habits are what separate tax surprises from predictable outcomes and leave more of your earnings to invest back into growth and long-term goals.