If you work for yourself, a good default is to set aside about 30% of your net income for federal taxes, and 35–40% if you live in a state with an income tax. The exact number depends on how much you earn, what deductions you qualify for, and where you live, but 30% is the figure most freelancers and independent contractors should start with and adjust from there. Two federal bills drive it: self-employment tax, which funds Social Security and Medicare, and regular income tax on your profits.
What You’re Actually Setting Money Aside For
When someone employs you, Social Security and Medicare taxes are split evenly between you and the company. When you employ yourself, you pay both halves. The combined self-employment tax rate is 15.3%, made up of 12.4% for Social Security and 2.9% for Medicare, and you owe it on any net profit of $400 or more.1Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
Two adjustments soften the hit. Before applying the 15.3%, you multiply your net earnings by 92.35%. And you can deduct the employer-equivalent half of your self-employment tax from your adjusted gross income, which lowers the income subject to regular tax.1Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) The 12.4% Social Security portion only applies to the first $184,500 of earnings in 2026; anything above that is still hit by the 2.9% Medicare portion but not Social Security.2Social Security Administration. Contribution and Benefit Base Higher earners face an Additional Medicare Tax of 0.9% on self-employment earnings above $200,000 for single filers or $250,000 for joint filers.3Social Security Administration. If You Are Self-Employed
Federal income tax then stacks on top. It’s progressive, so the first slice of taxable income is taxed at 10%, the next at 12%, and so on up to 37%. The 2026 brackets for single filers:4Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill
- 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
Joint-filer thresholds are roughly double. Before those rates apply, you subtract the standard deduction: $16,100 for single filers and $32,200 for married couples filing jointly in 2026.4Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill
A Worked Example at $80,000
Say you’re a single filer with $80,000 in net profit. Here’s how the numbers land:
- Self-employment tax: $80,000 × 92.35% × 15.3% ≈ $11,304
- Half of that self-employment tax is deductible, pulling adjusted gross income down to about $74,348
- Subtract the $16,100 standard deduction, and taxable income is about $58,248
- Federal income tax on that amount, using the 2026 brackets, comes to roughly $7,870
- Combined federal bill: about $19,174, or roughly 24% of net income
That 24% is the floor. It climbs quickly if you earn more, don’t qualify for many deductions, or owe state tax. Setting aside 30% of every payment into a separate account gives you a cushion; a small refund in April is a far better problem than a shortfall.
State and Local Tax Adds to the Percentage
Most states levy their own income tax on self-employment profits. Rates run from around 1% in states with flat, low-rate systems to over 13% in the highest-tax states, and about eight states have no individual income tax at all. Some cities and municipalities pile on another 1–3% earnings tax. Because these vary so much, check your state and local tax agency for the exact rates that apply to you, and add that number on top of your federal set-aside. In a high-tax state, 35–40% is the more realistic target.
Deductions That Lower How Much You Actually Owe
Every legitimate deduction cuts what you owe, and some of them cut both income tax and self-employment tax.
Business expenses. Ordinary costs of running your business—equipment, software, office supplies, advertising, professional services, business travel—reduce your net profit on Schedule C. A lower net profit means a lower income tax bill and a lower self-employment tax bill. Track these all year rather than reconstructing them in April.
Health insurance premiums. If you pay for your own health, dental, or vision insurance and aren’t eligible for coverage through a spouse’s employer plan, you can deduct those premiums as an adjustment to income. The deduction covers you, your spouse, your dependents, and children under age 27. The plan must be established under your business, though the policy can be in your name or the business’s.5Internal Revenue Service. Instructions for Form 7206
Retirement contributions. A SEP IRA lets you contribute up to 25% of your net self-employment earnings, with a 2026 maximum of $72,000. A Solo 401(k) offers a similar employer contribution limit plus an employee elective deferral, potentially allowing higher total contributions. Both reduce taxable income dollar-for-dollar.
Qualified Business Income (QBI) deduction. Eligible self-employed people can deduct up to 20% of net business income from taxable income. The deduction was made permanent starting in 2026 by the One, Big, Beautiful Bill Act. It applies to sole proprietorships, partnerships, and S corporations, with phase-outs for certain service-based businesses above specified income thresholds. QBI lowers income tax but does not reduce self-employment tax.
Paying It In: Quarterly Estimates
Setting money aside is only half the job. The IRS expects you to send it in four times a year using Form 1040-ES, not in a single lump sum at filing.6Internal Revenue Service. About Form 1040-ES, Estimated Tax for Individuals The 2026 due dates:7Internal Revenue Service. 2026 Form 1040-ES Estimated Tax for Individuals
- First quarter (January–March): April 15, 2026
- Second quarter (April–May): June 15, 2026
- Third quarter (June–August): September 15, 2026
- Fourth quarter (September–December): January 15, 2027
You can skip the January 15 payment if you file your full 2026 return and pay any remaining balance by February 1, 2027.7Internal Revenue Service. 2026 Form 1040-ES Estimated Tax for Individuals The four payments don’t have to be identical; adjust each one up or down as your income shifts.
You generally owe estimated tax if you expect to owe $1,000 or more after withholding and credits.7Internal Revenue Service. 2026 Form 1040-ES Estimated Tax for Individuals The IRS won’t charge an underpayment penalty if you hit one of these safe harbors:8Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty
- You paid at least 90% of your 2026 tax liability through estimated payments, or
- You paid at least 100% of the total tax shown on your 2025 return (110% if your 2025 adjusted gross income was over $150,000, or $75,000 if married filing separately).
The prior-year test is useful in a growing-income year: pay in 100% (or 110%) of last year’s tax and you’re protected from a penalty even if you owe a big balance at filing.
What Undersaving Costs
The IRS charges interest on any quarterly shortfall, calculated separately for each due date, so making it up late in the year doesn’t erase penalties from earlier quarters.8Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty The underpayment interest rate for 2026 is 7%, compounded daily.9Internal Revenue Service. Quarterly Interest Rates If you file late, the failure-to-file penalty is 5% of unpaid tax per month, up to 25%.10Internal Revenue Service. Failure to File Penalty If you file on time but pay late, the failure-to-pay penalty is 0.5% per month, also capped at 25%.11Internal Revenue Service. Failure to Pay Penalty Every one of these outcomes traces back to the same fix: move the right percentage into a separate account the day each payment arrives, and send it in on schedule.