Is Self-Employment Income Taxed? A Clear Guide for Freelancers

Yes, self-employment income is taxed. You owe federal income tax plus the self-employment tax that covers Social Security and Medicare, and you may also owe state tax depending on where you live.

What Taxes Apply to Self-Employment Income

When you work for yourself you are responsible for both the employee and employer shares of Social Security and Medicare. Together these make up the self-employment tax. In addition you pay regular federal income tax on your net profit after deductions. Most states also tax self-employment income, though a few have no state income tax.

How Self-Employment Tax Is Calculated

The self-employment tax rate is 15.3 % of your net earnings from self-employment. This breaks down into 12.4 % for Social Security and 2.9 % for Medicare. The Social Security portion applies only to the first $168,600 of net earnings for 2024; the Medicare portion applies to all net earnings.

Worked example

Suppose you have $60,000 of net profit after subtracting business expenses.

1. Social Security tax: $60,000 × 0.124 = $7,440
2. Medicare tax: $60,000 × 0.029 = $1,740
3. Total self-employment tax: $7,440 + $1,740 = $9,180

You can deduct one-half of this amount ($4,590) when calculating your adjusted gross income, which lowers your federal income tax bill.

How to Pay Estimated Taxes Quarterly

Because taxes are not withheld from your payments, the IRS expects you to make estimated tax payments four times a year. The due dates are typically April 15, June 15, September 15 and January 15 of the following year (adjusted for weekends and holidays).

Steps to stay on track

1. Estimate your total tax liability for the year (federal income tax plus self-employment tax).
2. Divide that amount by four to get the quarterly payment.
3. Send each payment to the IRS using Form 1040-ES or the online payment portal.
4. Mark the dates on your calendar and set a reminder a few days before each deadline.

If you underpay you may owe a penalty, even if you end up with a refund when you file your annual return.

The Tax Bucket System for Saving

A simple way to make sure you have the money ready for quarterly payments is to keep a separate savings account just for taxes.

How to set it up

1. Open a dedicated savings account (many banks let you label it “Tax Bucket”).
2. Whenever you receive client income, transfer a set percentage into that account. A common starting point is 25 % to 30 % of each payment, which covers both self-employment tax and federal income tax for many freelancers.
3. When a quarterly due date arrives, move the needed amount from the tax bucket to your checking account and send the payment.

This method removes the guesswork and helps you avoid spending money that belongs to the tax authority.

State Tax Considerations

Most states tax self-employment income, but the rules differ. Nine states, Alaska, Florida, Nevada, New Hampshire (taxes only interest and dividends), South Dakota, Tennessee, Texas, Washington and Wyoming, have no state income tax on wages or self-employment earnings. If you live in one of those, you only need to worry about federal taxes.

If your state does have an income tax, you will usually need to make state estimated payments as well. Many states follow the same quarterly schedule as the IRS, but some (like California) use different percentages for each quarter. Check your state’s Department of Revenue website for the exact due dates and payment portal.

A few states also have special rules about deductions. For example, Pennsylvania generally does not allow a home-office deduction for self-employed filers, while most other states follow the federal treatment.

Common Mistakes and How to Avoid Them

Mistake 1, Forgetting the deduction for half of self-employment tax
Some freelancers calculate the full self-employment tax and then pay income tax on the entire net profit, missing the adjustment that lowers AGI. To avoid it, always subtract 50 % of your self-employment tax from your net profit before applying federal income tax rates.

Mistake 2, Missing a quarterly deadline
Life gets busy and a payment date can slip by. The penalty for late or insufficient estimated taxes can add up quickly. The best defense is to automate transfers to your tax bucket and put the due dates in a digital calendar with alerts.

Mistake 3, Not tracking business expenses
If you don’t record receipts for software, home-office utilities, mileage or continuing education, you lose legitimate deductions that could reduce both income tax and self-employment tax. Use a simple spreadsheet or accounting software to log every expense as it happens.

Mistake 4, Mixing personal and business money
Paying for a personal grocery bill from your business account makes it harder to see what is truly deductible and can raise questions if you are ever audited. Keep a separate checking account for business income and expenses, and only move money to your personal account when you take a draw or salary.

Common questions

Is self-employment income taxed differently than employee income?

Yes. As an employee your employer withholds income tax, Social Security and Medicare from each paycheck and pays half of the Social Security and Medicare taxes. When you are self-employed you must pay both the employee and employer shares of Social Security and Medicare (the self-employment tax) and you handle your own income-tax withholding through quarterly estimated payments.

Is self-employment income taxable if I earn only a few hundred dollars a month?

All net self-employment earnings are subject to self-employment tax, regardless of amount. However, you may not owe federal income tax if your total income after deductions falls below the filing threshold. You still need to file a return and pay self-employment tax if your net earnings are $400 or more in a year.

Is self-employment income taxed twice?

It can feel like double taxation because you pay both income tax and self-employment tax, but they fund different programs. Income tax supports general government operations, while the self-employment tax specifically funds Social Security and Medicare. The deduction for half of the self-employment tax reduces the income-tax base, so you are not paying the full 15.3 % on the same dollar twice for income-tax purposes.

What form do I use to report self-employment income for taxes?

You report your business income and expenses on Schedule C (Form 1040). The self-employment tax is calculated on Schedule SE and the result flows to Form 1040. If you have expenses to deduct, keep good records so you can fill out Schedule C accurately.

Remember, staying organized with a tax bucket, marking quarterly dates on your calendar, and tracking every deductible expense will keep surprises to a minimum. If your situation feels complex, multiple states, large income changes, or questions about deductions, consider checking in with a tax professional who can review your specific facts.

(Want help figuring out what rate to charge so you can cover taxes and expenses? Try the Freelance Rate Calculator. Need a simple way to plan your monthly cash flow? The Budget Calculator lets you experiment with the 50/30/20 rule.)