Key Takeaways
- When you’re self-employed, you pay 15.3% in Social Security and Medicare taxes—double what employees pay, because there’s no employer to cover half.
- Tax payments are due quarterly. Missing them triggers IRS penalties that can add up fast.
Starting a business sounds exciting until you think ahead to the taxes you might pay. Then the anxiety kicks in. That fear showed up in a recent Reddit post from a 22-year-old getting ready to launch a side business this year:
“I understand you get taxed like there is no tomorrow if you start a small business. I was also looking into it and if you make less than $400 a year you won’t get taxed. But say (and hopefully) I do make over $400 a year—how hard am I going to get taxed? … I’m so bad with that stuff and extremely nervous to get something wrong because I don’t want people to come after me and arrest me.”
First, the reassuring news: the IRS doesn’t arrest anyone for making honest mistakes on their taxes. But when you work for yourself, you’re responsible for paying taxes that an employer would normally handle for you.
”What most people don’t realize is that if you are a W-2 employee, your employer is paying half of your Social Security and Medicare taxes for you,” Carol Bell, a wealth management advisor at Prudential Advisors and professor of financial planning at New York University told Investopedia. “This shows on your W-2, but it is not income, and W-2 employees would never receive this money in their paychecks, so many people don’t even realize it is something that the employer is paying.”
Let’s take you through how to handle this without the panic or penalties.
Why the 15.3% Hits So Hard
Once you earn $400 or more from self-employment, the IRS requires you to pay self-employment tax. The rate is 15.3% of your net earnings, split between 12.4% for Social Security and 2.9% for Medicare.
You don’t pay 15.3% on every dollar. The IRS gives you a small break by calculating the tax on 92.35% of your profit—not the full amount. So if you made $50,000, you’d multiply that by 92.35% to get $46,175, then apply the 15.3% rate for a total of about $7,065 in self-employment tax.
That’s just the self-employment tax. You’ll also owe regular income tax on top of that, which is why the total bill can feel like a shock.
There’s one break here: you can deduct half of your self-employment tax when figuring out your income tax, a separate benefit on top of the 15.3% calculation above. That 7.65% deduction helps, but it doesn’t make the bill disappear.
Tip
For higher earners: Social Security tax only applies to the first $176,100 you earn, but Medicare has no cap. If you’re single and make over $200,000, you’ll pay an extra 0.9% Medicare tax on anything above that threshold.
Quarterly Payments Aren’t Suggestions
If you expect to owe $1,000 or more in taxes for the year, the IRS wants quarterly payments. The 2025 deadlines were April 15, June 16, Sept. 15, and Jan. 15, 2026.
Skip a payment, and the IRS charges you a penalty based on daily interest. There’s a way to avoid penalties even if you guess wrong: pay at least 100% of what you owed last year, split into four payments. The IRS calls this a “safe harbor.”
If your income jumps around, this approach is easier than trying to predict your current year’s taxes.
Deductions That Actually Matter
Every legitimate business expense can reduce your taxable income. The IRS says expenses must be ‘ordinary and necessary’ for your type of work—which basically means: Would other people in your line of work spend money on this? If yes, it probably counts.
The home office deduction works if you use a specific area only for business. You can take $5 per square foot (up to 300 square feet, capping at $1,500) or calculate actual expenses if your space is bigger.
Software, equipment, phone bills, and internet count too, as long as you use them for work. If you’re self-employed and pay for your own health insurance without access to an employer plan, you can deduct 100% of your premiums for yourself, your spouse, and dependents. And that 7.65% “employer half” of your self-employment tax? Also deductible.
Keep your receipts. The IRS will ask for proof should there be any questions later.
How Much Money To Put Aside
A good rule of thumb: every time you get paid, move 25%–30% into a separate savings account for taxes. If you make $1,000 on a project, put $250–$300 aside before you spend anything.
That covers your 15.3% self-employment tax plus federal income tax, which starts at 10% and goes up from there depending on your bracket. Don’t forget state income tax—rates range from almost nothing to over 13%.
”Tax rates vary wildly depending on a person’s situation so you will want to work with a tax advisor, but you should expect to owe approximately 7.65% more of your taxable income to the government,” Bell says. “This would be the portion of the self-employment tax that is normally paid by an employer for a W-2 employee.”
Open a separate savings account just for taxes and put money in periodically when it comes in. Keeping it separate means you won’t accidentally spend it.
Let’s say you made $30,000 from your business. Here’s what you’d put aside:
- Self-employment tax (15.3% of 92.35%): About $4,240
- Federal income tax (depends on bracket): About $2,000–$3,500
- Total to set aside: $6,200–$7,700 (about 25% of your income)
Fast Fact
You won’t go to jail for making an honest mistake on your taxes. The IRS charges penalties and interest for underpayment. If you mess up, you fix it and move on.
When your income changes a lot or you have multiple clients, setting aside 25%-30% may not be enough.
“If you have multiple streams of income, or if your income varies a lot from year to year, it probably makes sense to start working with a tax professional,” Bell said. “If you find that the amount you owe in taxes each year is a lot more or a lot less than you were expecting, you probably need help. This tends to happen more quickly than self-employed people expect.”