Self-employed tax is based on your net profit, not your gross income

When you work for yourself, you pay tax on what you actually earn after expenses, not on every dollar that comes in. The IRS calls this your net profit. You calculate it by subtracting your business expenses from your total income. Only that number gets taxed.

You also owe self-employment tax, which covers Social Security and Medicare. Employees split this cost with their employer; when you're self-employed, you pay both halves. This is separate from income tax and is calculated on the same net profit figure.

Most self-employed people file taxes once a year, but you may owe quarterly estimated tax payments to the IRS if you expect to owe $1,000 or more when you file. Tracking income and expenses throughout the year makes the final calculation straightforward.

Key Takeaways

  • Self-employed tax is calculated on net profit (income minus business expenses), not on gross income.
  • You owe both income tax and self-employment tax, which together can total 25 to 30 percent of your net profit depending on your tax bracket.
  • Keep receipts and records for all business expenses — mileage, supplies, equipment, home office, and professional services — because these reduce the amount you owe.
  • If you expect to owe $1,000 or more in taxes for the year, you must make quarterly estimated tax payments by April 15, June 15, September 15, and January 15.
  • Schedule C (Form 1040) is where you report self-employment income and expenses; Schedule SE is where you calculate self-employment tax.

How to find your net profit

Start with your total business income for the year — this is all the money you received from clients, customers, or sales. Then list every business expense you paid. Common deductions include office supplies, equipment under $2,500, professional fees, insurance, vehicle mileage at the IRS rate (currently 67 cents per mile for 2024, though this changes yearly), rent or a home office deduction, and utilities if you use part of your home for work.

Subtract your total expenses from your total income. The number you get is your net profit. This is the figure you report on Schedule C of your tax return, and it is also the figure used to calculate self-employment tax on Schedule SE.

Keep records of everything. The IRS does not require you to send receipts with your return, but you must have them if you are audited. A straightforward spreadsheet, accounting software like Wave or GnuCash (both free), or a folder of receipts organized by month works. The method matters less than consistency and completeness.

Understanding self-employment tax

Self-employment tax covers Social Security and Medicare. The rate is 15.3 percent of your net profit (12.4 percent for Social Security, 2.9 percent for Medicare). However, you get to deduct half of what you pay from your income before calculating income tax, which reduces the total burden slightly.

There is a Social Security wage base limit — for 2024, you only pay the 12.4 percent Social Security portion on the first $168,600 of net profit. Income above that amount is not subject to the Social Security part, though it is still subject to the 2.9 percent Medicare tax. This means high earners pay a lower overall self-employment tax rate.

You calculate self-employment tax on Schedule SE. The form walks you through the math: it takes your net profit, applies the 15.3 percent rate (with adjustments for the deductible portion), and gives you the amount you owe. This amount is then added to your income tax bill.

Quarterly estimated tax payments

If you expect to owe $1,000 or more in federal income tax and self-employment tax combined, you must send the IRS money four times a year instead of waiting until April. These are called estimated tax payments. The due dates are April 15, June 15, September 15, and January 15 of the following year.

To calculate what to send each quarter, estimate your total net profit for the year, calculate what you think you will owe in income tax and self-employment tax, and divide by four. If your income is uneven — for example, you earn much more in summer than winter — you can pay different amounts each quarter based on what you actually earned that quarter, though this requires more record-keeping.

You can pay online through IRS Direct Pay, by phone, by mail, or through a tax professional. Paying on time avoids penalties. If you underpay, the IRS charges interest on the shortfall when you file your return. If you overpay, you get a refund or can credit the overpayment to next year's taxes.

Deductions that reduce what you owe

The more legitimate business expenses you document, the lower your net profit and the less tax you owe. Common deductions include vehicle mileage (use the IRS standard rate, not actual costs, unless actual costs are higher), office supplies and equipment under $2,500, professional services like accounting or legal fees, business insurance, rent for a dedicated office space, and a home office deduction if you use part of your home exclusively for work.

A home office deduction can be calculated two ways: the simplified method (multiply your home office square footage by $5 per square foot, up to 300 square feet) or actual expenses (your share of rent, utilities, internet, and home maintenance based on the percentage of your home used for work). Keep receipts for both approaches and use whichever gives you a larger deduction.

You cannot deduct personal expenses, even if you use them partly for work. For example, you cannot deduct your entire internet bill, only the portion used for business. You also cannot deduct expenses you have not actually paid. Meals and entertainment are only partially deductible (50 percent in most cases), and some items like vehicles require depreciation calculations rather than when ready write-offs.

Choosing between Schedule C and Schedule C-EZ

Most self-employed people file Schedule C (Profit or Loss from Business), which is a detailed form where you list income and expenses line by line. This is the standard form and works for any business structure or income level.

Schedule C-EZ is a simpler version available only if your gross income is under $5,000, you have no employees, you did not have a net loss, and you meet a few other conditions. It takes less time but gives you less room to list deductions. If you have significant expenses or income over $5,000, use Schedule C instead.

Both forms feed into your main tax return (Form 1040). The net profit from Schedule C is reported on line 3 of Form 1040, and the self-employment tax from Schedule SE is reported on line 15. Your tax software or accountant will handle this transfer automatically.

Record-keeping systems that work

You do not need an expensive system. A spreadsheet with columns for date, description, category (supplies, mileage, fees, and so on), and amount works fine. Update it weekly or monthly so you do not forget transactions. Keep receipts in a folder organized by month or category.

If you prefer software, Wave and GnuCash are free and designed for small business. QuickBooks Self-Employed costs about $15 per month and integrates with your bank account to pull in transactions automatically. Freshbooks and Zoho Books are also options if you want invoicing and expense tracking in one place.

For mileage, keep a log with the date, starting location, ending location, business purpose, and miles driven. Many people use a mileage app like MileIQ or Stride Health, which tracks location automatically. The IRS standard mileage rate changes yearly, so check the current rate when you file.

What happens if you do not pay quarterly taxes

If you owe $1,000 or more and do not make quarterly payments, the IRS charges a penalty when you file your return. The penalty is calculated based on how much you underpaid and how late you were. It is not huge — usually a few percent of the unpaid amount — but it is avoidable by paying on time.

You can also face interest charges on any taxes you owe late. The interest rate is set quarterly and is currently around 8 percent per year. Over time, interest adds up, so paying what you owe on schedule is cheaper than waiting until April.

If you have a very low income year and do not owe $1,000, you do not have to make quarterly payments. You can straightforward pay everything when you file your return in April. This is one reason tracking your income throughout the year matters — you can tell early whether you will hit the $1,000 threshold.

Frequently Asked Questions

Can I deduct my home office if I work from my kitchen table?

Only if you use a dedicated space exclusively for work. The IRS requires that the space be used regularly and exclusively for business. A kitchen table you also use for meals does not may have access to. If you have a spare bedroom or corner of a room used only for work, you can deduct that space using either the simplified method ($5 per square foot) or actual expenses.

What if my income varies a lot from month to month?

Track it as it comes in and adjust your quarterly payments based on what you actually earned that quarter. If you earned $8,000 in the first quarter and $2,000 in the second, you can pay more in Q1 and less in Q2. Keep records of what you earned each quarter so you can calculate the right payment amount. If you underpay early quarters, you can catch up in later ones.

Do I have to file taxes if I made very little money?

If your net profit is under $400, you do not owe self-employment tax and usually do not have to file a federal return. However, if you had income tax withheld or are due a refund, you should file anyway to get that money back. Check the IRS filing requirements for your specific situation on their website.

What is the difference between a deduction and a credit?

A deduction reduces the income you pay tax on. A credit reduces the tax you owe directly. A $1,000 deduction might save you $200 to $300 in taxes depending on your tax bracket. A $1,000 credit saves you $1,000. Credits are more valuable, but most self-employed people use deductions to lower their taxable income.

Should I hire an accountant or use tax software?

If your business is straightforward — one income stream, straightforward expenses, no employees — tax software like TurboTax Self-Employed or TaxAct works well and costs $100 to $200. If you have multiple income sources, rental property, investments, or employees, an accountant can find deductions you might miss and usually pays for itself. Many accountants charge $500 to $2,000 depending on complexity.