Understanding Self-Employment Taxes: Plan, Play and Save

July 31, 2025

If you are self-employed, handling taxes can be one of the hardest parts of managing your business money. Unlike traditional employees, self-employed individuals must handle their own taxes. They calculate, report, and pay their taxes, usually every three months. This added responsibility can bring surprises, especially regarding the self-employment tax.

What Is Self-Employment Tax?

The self-employment tax is essentially the self-employed individual’s version of Social Security and Medicare taxes. If you work for an employer, you pay 7.65% of your wages toward these federal programs, and your employer matches that amount. But when you work for yourself, you are both the employer and the employee. That means you’re responsible for the full 15.3%.

This tax applies to your net earnings from self-employment, which typically means your business income after expenses. It’s worth noting that while this 15.3% can come as a shock to new business owners or freelancers, it’s a mandatory cost of doing business independently.

You may owe federal income taxes along with the federal self-employment tax. You might also owe state income taxes, depending on where you live. The good news? There are no separate state-level self-employment taxes.

Key Tax Deductions for the Self-Employed

One benefit of being your own boss is that you can use many tax deductions. These deductions can lower your taxable income. For example, you can deduct the employer-equivalent portion of your self-employment tax—essentially half of that 15.3%—from your gross income when calculating your federal income tax.

Many business owners may also qualify for the Qualified Business Income (QBI) deduction, which can allow eligible filers to deduct up to 20% of their business income. You can also deduct contributions to self-employed retirement plans. This includes SEP IRAs, SIMPLE IRAs, and Solo 401(k)s. Whether you can deduct them depends on your income and the type of plan you have.

Other common deductible expenses for self-employed individuals include:

●     Business insurance premiums

●     Health insurance (if you’re not eligible for an employer-sponsored plan)

●     Marketing and advertising costs

●     Office supplies and equipment

●     Legal and professional fees

●     Travel and vehicle expenses related to your business

Tracking these expenses accurately throughout the year can lead to significant tax savings come filing season.

Quarterly Estimated Tax Payments

Another critical aspect of managing taxes as a self-employed professional is understanding how and when to make estimated tax payments. Because taxes aren’t automatically withheld from your income, you’re required to pay them yourself in four quarterly installments throughout the year.

These estimated payments cover both your self-employment tax and your income tax. The IRS has specific deadlines for each quarter—typically in April, June, September, and January. If you miss a payment or don’t pay enough, you may be subject to penalties and interest, even if you’re due a refund later.

To avoid underpayment, many tax professionals recommend using one of two “safe harbor” methods:

●     Pay 90% of your current year’s expected tax liability (divided equally across four quarters), or

●     Pay 100% of your prior year’s total tax (110% if your adjusted gross income exceeded $150,000), also divided by four.

Because calculating these amounts can be tricky—especially with variable income—it may be wise to work with a tax advisor.

Tips for Managing Your Tax Responsibilities

Managing taxes doesn’t have to be overwhelming if you take the right steps:

1.    Separate your finances: Use distinct accounts for personal and business expenses. This makes bookkeeping and tax reporting significantly easier and reduces your chances of triggering an IRS audit.

2.    Keep detailed records: Save receipts, invoices, mileage logs, and all other documentation related to your business. The IRS recommends keeping tax records for at least seven years.

3.    Understand multi-state income rules: If you work in more than one state, research each state’s income thresholds and filing requirements. You may need to file additional returns based on where your income was earned.

4.    Use accounting tools or software: Consider using digital tools or apps designed for small business accounting. These can simplify tracking income and expenses, estimate quarterly payments, and prepare for filing season.

Final Thought

Paying taxes as a self-employed individual requires proactive planning and attention to detail. From understanding your obligations under self-employment tax to taking full advantage of allowable deductions, staying organized and informed can save you money—and stress. When in doubt, consult a tax professional who specializes in working with freelancers or small business owners. With the right support and preparation, you can focus on growing your business while staying on the right side of the IRS.

Sources:

https://www.fidelity.com/learning-center/life-events/self-employment-tax

Disclosure:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

This material is provided as a courtesy and for educational purposes only.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.

Our firm does not offer tax or legal advice. Consult your tax or legal advisor regarding your situation.