How Much Money Should I Set Aside for Taxes as Self-Employed?

Forget the days when your boss did the tax math for you. When you're self-employed, no one is stashing away taxes on your behalf. It’s just you, your income, and a government that still wants its cut, whether you’re freelancing for some extra money or running your own show full time.

If you don’t plan for taxes, it’s like walking into a rainstorm without an umbrella—sooner or later, you’ll get soaked. But how much should you actually set aside? Spoiler: It's almost never as simple as just 10% or 15% of your income. Most self-employed folks in the U.S. end up needing to save somewhere between 25% to 30% once you include federal income tax, state taxes (depending on your state), and self-employment tax (which itself is currently 15.3%).

Here's the hard truth: Self-employment tax covers both Social Security and Medicare, and you pay it on top of regular income tax. If you’re not setting aside money for both, tax time will hit hard. The biggest mistake I made my first year was only budgeting for income tax. My own panic moment came after a summer of freelancing and lots of pizza with my kids—August rolled in, and my savings was nowhere close to what I owed for self-employment tax.

• Why Taxes Feel Different When You're Self-Employed
• How to Estimate What You Owe
• Quarterly Taxes: What, Why, and How
• Deductible Expenses—What Counts?
• Smart Ways to Save for Your Tax Bill
• Avoiding Common Tax Pitfalls

Why Taxes Feel Different When You're Self-Employed

Here’s the thing: when you’re an employee, taxes are mostly invisible. Your boss withholds a chunk from every paycheck, sends it straight to the IRS, and you get a tidy W-2 at the end of the year. You might owe a little in April, or maybe you get a refund. Simple, right?

Once you’re self-employed, every dollar you earn lands in your pocket—until tax season rolls in and you realize not all of it belongs to you. The IRS considers you both the employee and the boss, which means you’re now responsible for something called the self-employment tax. That’s 15.3% right off the top, split between Social Security and Medicare. Employees only pay half; their employer covers the rest.

On top of that, you’re still on the hook for federal and (sometimes) state income tax. No one tells you what to pay or when—if you don’t send estimated payments four times a year, you can get smacked with penalties that really sting.

Another big change? You can deduct business expenses to shrink your taxable income. Stuff like internet, a home office corner, or work tools—totally legit and helps take some of the sting out. But tracking them falls on you, not payroll.

So honestly, taxes feel different because you’re wearing every hat. You have to act as your own payroll department, accountant, and bookkeeper. If you earn over $400 in self-employment income, you’ve got to file, end of story. No more ignoring that part—trust me, that never ends well.

The upside? If you get this part right, you’ll dodge surprises and feel way more in control, even if it takes a bit more math and discipline.

How to Estimate What You Owe

Trying to guess your tax bill as a self-employed person is a recipe for stress. You want to figure it out before the IRS comes asking. The best way is to use a simple formula: add your expected income, subtract deductible business expenses, and then apply the tax rates that actually hit self-employed folks.

You need to cover two main things: self-employment tax and income tax. Self-employment tax for 2025 is still 15.3%. That’s both Social Security (12.4%) and Medicare (2.9%). On top of that, federal income tax rates run from 10% up to 37%, depending on your total taxable income. If you’re in a state with income tax, factor that in too.

Let’s break it down into steps:

1. Calculate your net business income. That’s your total income minus deductible expenses (like software, advertising, or that shockingly overpriced coffee you needed to survive an all-nighter).
2. Multiply your net income by 92.35%. That’s the part of your income subject to self-employment tax.
3. Apply the 15.3% self-employment tax rate to the number from step 2.
4. Estimate your federal income tax. Use the IRS tax brackets for single or married filers, whatever fits your situation.
5. Add everything up—self-employment tax, income tax, and state tax if needed. This is roughly what you’ll owe for the year.

It helps to look at real numbers. Here’s a quick example for someone with $60,000 in net self-employed income:

Notice that over $8,000 of that bill is just for self-employment tax. That catches a lot of new freelancers off guard. If your income goes higher, you may move into a higher tax bracket. Use an online calculator (the IRS even has a free one) to play with your real numbers.

And don’t forget about your self-employed deductions: stuff like home office expenses, part of your cell phone bill, internet, or mileage for business drives. Forgetting these is like tossing money out the window.

Quarterly Taxes: What, Why, and How

If you’re self-employed, you can’t just pay taxes once a year like most employees. The IRS wants its money throughout the year, which means making quarterly payments—every April, June, September, and January. These are called estimated tax payments, and skipping them can lead to some pretty hefty penalties.

Why quarterly? The government works on a pay-as-you-go system—your paychecks don’t get withheld, so you’re expected to pay as you earn. If you expect to owe at least $1,000 in taxes for the year (after subtracting any withholdings or credits), you’re supposed to pay estimated taxes four times a year. This applies whether you’re freelancing part time or running a full-blown business.

Calculating these payments sounds intimidating, but it boils down to a few main steps:

1. Figure out your total expected income for the year (before taxes).
2. Estimate your deductible expenses and subtract them from your income. This gives you your estimated taxable income.
3. Calculate your total taxes owed—including self-employed tax and, if you live in a state with income tax, state taxes.
4. Divide that number by four. That’s what you pay each quarter.

The IRS form most people use for this is Form 1040-ES. If you overpay a bit, that’s way better than being caught short in January. I once forgot a payment while road-tripping with my kids, and let’s just say the IRS reminder wasn’t as friendly as a postcard from the Grand Canyon.

Quick tip: Even if your earnings are unpredictable, pay something each quarter based on your best guess. You can always adjust the payments as the year goes on, but paying nothing is what triggers those penalty fees. Setting reminders in your phone calendar for each due date can save you a world of hurt.

Deductible Expenses—What Counts?

This is where a lot of self-employed people either save money or leave it on the table. Basically, a deductible expense is something you buy for your business, and the IRS lets you subtract the cost from your income. The less income you report, the lower your tax bill, which is always a win. But you need to know what really counts.

Here’s a quick rundown of common deductible expenses:

• Home office costs (like a portion of rent, utilities, or internet—strictly for the space you use to work)
• Business supplies (think: laptops, printers, stationery)
• Software and subscriptions (like invoicing tools or design programs)
• Travel, meals, and lodging related to work (grab that receipt from your coffee shop client meeting!)
• Marketing and advertising (website hosting, online ads, even business cards)
• Insurance (professional liability, health plans if you pay for your own)
• Professional fees (tax prep, consulting, or legal advice)

The golden rule? If you wouldn’t have bought it except for your work, it probably counts as a business expense. But don’t get too creative—personal expenses wrapped into your business are usually an audit magnet.

"Tax deductions are an essential part of business budgeting. Every legitimate deduction puts real cash back in your pocket—not just pocket change." — IRS Small Business and Self-Employed Tax Center

It’s easy to think little things don’t matter, but all those expenses add up. In 2023, the IRS reported millions of Schedule C filings, and on average, business owners deducted over $17,000 in expenses.

Want to avoid headaches later? Keep good records and save every receipt, either in a folder or snapped into an app. Remember, you only get to claim what you can prove.

If you’re not sure what to count, check with a tax pro. Missing legit deductions means you’re giving the government a tip. And no one wants to be that generous—especially if you’re self-employed and watching every dollar.

Understanding deductible expenses helps keep your self-employed tax bill in check and your business above water.

Smart Ways to Save for Your Tax Bill

Saving for taxes doesn’t have to be a guessing game or something you leave until the last minute. The earlier you start setting money aside, the less stressful tax season will be. Let’s break down some practical tactics that actually work for self-employed folks.

First things first: Stop mixing business money with your personal cash. Open a separate business bank account. Every time you get paid, move a chunk of your earnings—think 25% to 30%—straight into a high-yield savings account just for taxes. This way, the temptation to dip into your tax stash for new shoes or pizza with the kids is way smaller.

Make use of the 'pay yourself first' rule. The easiest way? Set up an automatic transfer from your checking to your tax savings every time an invoice is paid. Most banks or online banking apps let you do this in minutes. Your future self will thank you when tax day comes.

If you want to get technical, use online tax calculators like the IRS Tax Withholding Estimator or business accounting apps (QuickBooks, FreshBooks, etc.) that spit out a number after you enter your income and expenses. They’re not just for big businesses—side hustlers and solo workers can use them too.

Here’s a quick list to make sure you’re on the right track:

• Always base your savings on your gross—not net—earnings before expenses.
• Check tax rates in your state. Or, if you move a lot, keep track with a simple spreadsheet.
• Review your income every quarter. If things are busier (or slower), switch up how much you set aside.
• Don’t forget about local taxes if your city or county charges them.

The most important thing? Prioritize setting aside enough for self-employed taxes. No surprises, just cash ready when it’s time to settle up with Uncle Sam. After a year of running my own show, nothing felt better than writing a tax check knowing I’d planned for it—no panic, no payday loan apps, no sweat.

Avoiding Common Tax Pitfalls

Messing up your taxes when you're self-employed isn’t rare—it’s actually the norm until you learn the ropes. So, let’s talk about the traps that get people every year and how to sidestep them, especially when dealing with self-employed taxes.

One of the biggest headaches? Not putting money aside throughout the year. The IRS expects you to pay estimated taxes every quarter; ignoring this often leads to painful penalties. In 2023, about 10 million people got hit with penalty fees just for underpaying their estimates or paying late. That’s a lot of coffee money lost just because someone missed a deadline.

• Forgetting quarterly payments: The IRS doesn’t care that you’re busy. Mark those deadlines (April, June, September, January) on your phone calendar right now.
• Mixing business and personal funds: If you can’t tell your business expenses from your grocery runs, you’ll drive yourself and your accountant crazy. Open a separate bank account and stick to it.
• Missing deductions: So many people leave money on the table by not tracking deductible expenses. Things like a home office, business mileage, and software subscriptions can all help lower your tax bill—so don’t ignore those receipts.
• Poor recordkeeping: IRS audits are rare for small operations (under 1%), but sloppy records make even a basic return harder and put you at risk if you get reviewed. Apps make tracking easy—just snap pics of receipts and log income as it comes in.

Want some numbers? Check out this table showing the common penalty amounts the IRS charged in 2023 for late and underpaid estimated taxes:

Couple tips: Save at least 25-30% of each payment you get. Make it a habit, like brushing your teeth. And double-check state requirements—some states have even stricter rules and higher penalties if you miss deadlines or mess up your math. Staying on top of these little things saves you big headaches and even bigger bills.