Freelancer Tax Guide: What Self-Employed Workers Need to Know

Quick answer: Freelancers pay both income tax and self-employment tax (15.3%) on net earnings. Set aside 25-30% of every payment for taxes and make quarterly estimated payments to avoid penalties.

Self-employment tax, explained

When you're a W-2 employee, your employer pays half of your Social Security and Medicare taxes (7.65%) and you pay the other half through payroll withholding. As a freelancer you're both employer and employee, so you owe the full 15.3% yourself. This is the tax that surprises people in their first freelance year.

The 15.3% breaks down as 12.4% Social Security (capped at $168,600 of earnings in 2025) and 2.9% Medicare (no cap). High earners owe an additional 0.9% Medicare surtax above $200,000 single, $250,000 married filing jointly.

One bit of relief: you can deduct half of your SE tax from your adjusted gross income. That doesn't reduce the SE tax itself, but it does reduce the income tax you owe on top of it. It's an above-the-line deduction, so you get it whether or not you itemize.

How to calculate what you owe

The order of operations matters because the deductions stack:

1. Calculate net self-employment income: Gross 1099 income minus all business deductions.
2. Calculate SE tax base: Multiply net income by 92.35% (this adjustment accounts for the employer-equivalent portion).
3. Calculate SE tax: Multiply the SE tax base by 15.3%.
4. Calculate the SE tax deduction: Half of your SE tax is deductible from income.
5. Calculate AGI: Add all income sources, subtract the SE tax deduction and other above-the-line deductions.
6. Calculate income tax: Apply your marginal tax rates to taxable income (AGI minus standard/itemized deductions).

Worked example

Single filer, $80,000 in 1099 income, $10,000 in legitimate business expenses:

• Net SE income: $80,000 - $10,000 = $70,000
• SE tax base: $70,000 × 92.35% = $64,645
• SE tax: $64,645 × 15.3% = $9,891
• SE tax deduction: $9,891 × 50% = $4,946
• AGI: $70,000 - $4,946 = $65,054
• Standard deduction (2025): $15,000
• Taxable income: $65,054 - $15,000 = $50,054
• Federal income tax: ~$6,617
• Total federal tax: $9,891 + $6,617 = $16,508 (23.6% effective rate)

Use our Side Hustle Tax Calculator for an instant calculation tailored to your situation.

Quarterly estimated payments

If you expect to owe $1,000 or more for the year, the IRS wants four estimated payments throughout the year, not one big check in April. Miss a deadline and you owe an underpayment penalty — basically interest on the amount you were supposed to have paid.

Safe harbor: You can sidestep the underpayment penalty by paying 100% of your prior year's total tax liability (110% if your AGI was above $150,000), spread across the four quarters. This works even if your actual liability ends up higher; you just owe the difference at filing.

Deductions worth tracking

Every legitimate business expense reduces your taxable income dollar for dollar. The big categories:

• Home office: Dedicated space used exclusively for business ($5/sq ft simplified method or actual expenses)
• Equipment: Computer, monitor, desk, chair, camera, microphone
• Software: Creative tools, project management, accounting software
• Internet and phone: Business-use percentage of your bills
• Health insurance premiums: 100% deductible if you're not eligible for employer coverage
• Retirement contributions: SEP IRA (up to 25% of net earnings), Solo 401(k)
• Professional development: Courses, books, conferences related to your work
• Business travel: Transportation, lodging, 50% of meals during business travel
• Professional services: Accountant, lawyer, virtual assistant fees
• Mileage: 67 cents per mile (2025) for business driving

Planning moves that actually move the bill

1. Open a self-employed retirement account

A SEP IRA lets you put away up to 25% of net self-employment earnings, capped at $69,000 for 2025. A Solo 401(k) has similar overall limits but lets you contribute as both employee and employer, which often gets you to the cap on lower income. Both reduce your taxable income the year you contribute.

2. Time your income and expenses

If you're expecting a high income year, push invoices into January and pull deductible expenses into December. Reverse it if next year looks weaker. The technical name is "income smoothing"; the practical version is "send the December 28 invoice on January 2 if you can afford to wait."

3. Consider S-corp election once you're past about $60K

At higher income, electing S-corp status for your LLC can save real money on SE tax. You pay yourself a "reasonable salary" through payroll (which is subject to FICA), and the rest of the profit comes out as distributions (which aren't). The catch: there's payroll administration overhead, and "reasonable salary" is not arbitrary — the IRS has audit guidelines. Talk to a CPA before you do this.

4. Track every expense from day one

Use accounting software (QuickBooks Self-Employed, Wave, FreshBooks) and connect a dedicated business card. Missed deductions cost more than the software does. Keep receipts for anything over $75, and log business miles in real time — the IRS doesn't accept "approximately 8,000 miles."

State tax

State income tax is its own thing on top of federal. Rates run from 0% in places like Texas, Florida, and Wyoming to over 13% in California. If you work with clients in multiple states, some of those states may consider you to have tax nexus, which means you owe filings (and sometimes tax) there too. This is the part of freelance taxes where a CPA pays for itself the first year you use them.