If you work for yourself, plan to set aside 25% to 30% of your net income for federal taxes. That range covers the 15.3% self-employment tax plus a moderate federal income tax bracket, and it leaves a small cushion for calculation errors. Contractors netting above roughly $200,000 should move toward 35% or more at the federal level alone. State income tax, where it applies, is on top of all of that.
How much to save for taxes as an independent contractor isn’t a single number because two separate taxes are stacked on your earnings, and the second one scales with how much you make.
Why the Number Starts at 25%
W-2 employees split Social Security and Medicare with their employer. You don’t. You owe both halves yourself, which is called self-employment tax, and the rate is 15.3% — 12.4% for Social Security and 2.9% for Medicare.1Internal Revenue Service. Topic No. 554, Self-Employment Tax That rate applies to 92.35% of your net earnings, which makes the effective self-employment tax about 14.1% of net income.
Two ceilings and one add-on matter at higher incomes. In 2026, only the first $184,500 of net self-employment earnings is subject to the 12.4% Social Security portion.2Social Security Administration. Contribution and Benefit Base Every dollar above that still owes the 2.9% Medicare tax. And once your self-employment income passes $200,000 as a single filer or $250,000 filing jointly, an extra 0.9% Medicare tax applies to the amount over the threshold.3Internal Revenue Service. Topic No. 560, Additional Medicare Tax
On top of self-employment tax, you owe regular federal income tax on your earnings. The 2026 brackets for single filers:
- 10% up to $12,400
- 12% from $12,401 to $50,400
- 22% from $50,401 to $105,700
- 24% from $105,701 to $201,775
- 32% from $201,776 to $256,225
- 35% from $256,226 to $640,600
- 37% over $640,600
For married couples filing jointly, each threshold roughly doubles — the 22% bracket starts at $100,800 and the 24% bracket at $211,400.4Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Brackets are progressive, so each rate applies only to the income inside that range.
Picking Your Number: A Worked Example
The 25–30% rule is a starting point. Running the numbers for your own situation tells you what to actually save. Here’s how it works for a single filer with $100,000 in net self-employment income and no other income sources.
Self-employment tax. $100,000 × 0.9235 × 0.153 = $14,130.
Deduct half the self-employment tax. You can subtract the employer-equivalent portion ($7,065) from gross income. Adjusted gross income drops to $92,935.5Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
Standard deduction. For 2026 that’s $16,100 for single filers and $32,200 for married filing jointly.4Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Taxable income is now $76,835.
Qualified Business Income deduction. Most sole proprietors can deduct 20% of their qualified business income, which here is $20,000. Taxable income falls to $56,835.6Internal Revenue Service. Qualified Business Income Deduction
Federal income tax. Apply the brackets to $56,835: $1,240 at 10% + $4,560 at 12% + $1,416 at 22% = $7,216.
Total federal tax. $14,130 + $7,216 = $21,346, or about 21.3% of the $100,000. Add a 5% state income tax and the effective rate climbs to roughly 26%.
That’s why 25–30% works for a lot of contractors — it builds in room for state tax and small misestimates. If your net income runs above $200,000, higher marginal brackets plus the additional Medicare tax push the savings rate toward 35% or more before state tax.
Deductions That Change What You Actually Owe
Everything in the calculation depends on net income, not gross revenue. Each legitimate business expense you track lowers the income that gets taxed, which in turn lowers how much you need to set aside.
The half-of-self-employment-tax deduction is automatic — you don’t need to itemize, and it reduces your AGI directly.5Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
The QBI deduction is the big one. It lets eligible self-employed people deduct up to 20% of qualified business income from a sole proprietorship, partnership, or S corporation, and it was made permanent in 2025.6Internal Revenue Service. Qualified Business Income Deduction Above certain income thresholds, the deduction is reduced or eliminated for specified service businesses like consulting, law, accounting, and health care. Below those thresholds, the full 20% is available regardless of profession.
Ordinary business expenses go on Schedule C and only the profit flows through to your return. Common categories include a home office (the simplified method is $5 per square foot up to 300 square feet, or $1,500),7Internal Revenue Service. Simplified Option for Home Office Deduction vehicle costs (72.5 cents per mile for 2026, or actual expenses),8Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents Per Mile supplies and software, and professional development. Keep receipts. The IRS can disallow deductions you can’t substantiate, which means owing tax on income already spent on legitimate business costs.
If you pay for your own health insurance and aren’t eligible for coverage through a spouse’s employer plan, you can deduct premiums for medical, dental, and vision coverage for yourself, your spouse, and dependents (plus children under 27). It’s an above-the-line deduction, so it reduces AGI without itemizing, but it can’t exceed your net profit and doesn’t apply to any month you were eligible for an employer-subsidized plan.9Internal Revenue Service. Instructions for Form 7206
Retirement contributions also cut taxable income. A SEP IRA allows up to 25% of net self-employment earnings, capped at $72,000 for 2026.10Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs) A Solo 401(k) lets you defer up to $24,500 as the employee plus 25% of net earnings as the employer, to the same combined $72,000 ceiling, and often shelters more than a SEP at lower income levels.11Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026
Setting the Money Aside: Quarterly Payments
No one withholds taxes from your client payments, so the IRS expects you to pay as you earn. If you’ll owe $1,000 or more in federal tax for the year after withholding and credits, you must make quarterly estimated payments.12Internal Revenue Service. Estimated Taxes
The 2026 deadlines:
- April 15, for income earned January through March
- June 15, for income earned April through May
- September 15, for income earned June through August
- January 15, 2027, for income earned September through December
If a deadline falls on a weekend or holiday it shifts to the next business day.13Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty The periods are uneven. The second quarter is only two months, which trips up contractors who divide their annual estimate by four and then underpay the June payment.
Pay through IRS Direct Pay (free, straight from a bank account), the Electronic Federal Tax Payment System (EFTPS), or by mailing a check with Form 1040-ES.14Internal Revenue Service. Direct Pay With Bank Account Direct Pay needs no account setup; EFTPS requires enrollment but lets you schedule payments in advance.15Internal Revenue Service. EFTPS – The Electronic Federal Tax Payment System
How to Avoid the Underpayment Penalty
If you don’t pay enough during the year, the IRS charges a penalty on the shortfall at an interest rate that updates quarterly. In early 2026, that rate was 7% for the first quarter and 6% for the second, compounded daily.16Internal Revenue Service. Quarterly Interest Rates
Two safe harbors keep you clear:13Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty
- Pay at least 90% of the tax you’ll owe for the current year.
- Pay at least 100% of the total tax on your previous year’s return. If your prior-year AGI exceeded $150,000 ($75,000 if married filing separately), the threshold rises to 110%.
The prior-year rule is the easier one, especially in your first couple of years when income is unpredictable. You know last year’s tax bill exactly, so you can divide by four and send that amount each quarter regardless of how the current year is tracking. If your income drops significantly, you may overpay and wait for a refund.
Contractors with lumpy or seasonal income can use the annualized income installment method (Form 2210, Schedule AI) to size each quarterly payment to the income actually earned in that period.13Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty More work, but it prevents a penalty for a quiet quarter followed by a strong one. The IRS may also waive the penalty if you retired after age 62 or became disabled during the year with reasonable cause, or if the underpayment stemmed from a casualty or disaster.17Internal Revenue Service. Instructions for Form 2210
Add Your State Tax on Top
The 25–30% range covers federal only. Most states have their own income tax, with rates running from zero in about eight states to over 13% at the top. A contractor in a state with a flat 5% income tax needs to add roughly five percentage points to the federal savings rate. In a high-tax state with progressive brackets, add eight or more points at higher income levels.
A handful of states also impose separate taxes on self-employment income or require local business taxes. Check your state’s estimated tax deadlines early — most mirror the federal schedule, and underpayment penalties work the same way.
One last point on income you might think doesn’t count: the $2,000 1099-NEC reporting threshold governs when a client has to file paperwork, not what you owe.18Internal Revenue Service. Publication 1099 General Instructions for Certain Information Returns (2026) You must report every dollar of self-employment income, including from clients who paid you less and never sent a form. The filing trigger for self-employment tax is $400 in net earnings for the year.1Internal Revenue Service. Topic No. 554, Self-Employment Tax Save against the full number, not just what shows up on 1099s.