Taxes When You Work for Yourself

When you worked for someone else, taxes came out of every paycheck and you barely thought about them. Now every dollar a customer pays you arrives whole, and none of it has been withheld.

That is the biggest tax shift for new owners. You are now responsible for your own income tax and for both halves of Social Security and Medicare. With a simple system, it is very manageable.

Self-employment tax, explained

Employees and employers each pay 7.65% for Social Security and Medicare. When you work for yourself, you are both, so you pay the combined 15.3% as self-employment tax. It applies once your net earnings from self-employment reach $400 for the year.

The rate splits into 12.4% for Social Security (only up to the 2026 wage base of $184,500) and 2.9% for Medicare (no cap). It applies to 92.35% of your net profit, which mirrors the employer share an employee never sees. You can also deduct half of your SE tax when figuring income tax.

Quarterly estimated taxes

The IRS expects tax to be paid as you earn. If you expect to owe $1,000 or more when you file, you generally need to make estimated tax payments using Form 1040-ES. The four periods are not equal quarters, so mark these dates.

How much to set aside

A common rule of thumb is to set aside 25% to 30% of your net profit for federal and state taxes. It is a starting point, not a precise number: your bracket, state, deductions, and household income all change it. A tax pro can help you fine-tune it after your first year.

Deductions that lower your bill

Business expenses that are ordinary and necessary for your trade reduce your profit, which lowers both income tax and SE tax. Common ones include:

• Supplies, materials, and inventory you sell
• Business use of your vehicle (2026 standard rate: 72.5 cents per mile for January to June, or actual costs)
• A home office used regularly and only for business
• Software, phone, and internet (business share)
• Advertising, website, and professional fees
• Retirement plan contributions such as a SEP IRA or solo 401(k) (see retirement for owners)
• Self-employed health insurance premiums, if you qualify

Keep records that hold up

Save receipts, invoices, bank statements, and a mileage log. Digital copies are fine. The habit matters more than the tool, and bookkeeping basics shows a simple monthly routine.