A paycheck has tax removed before you see it. Freelance income does not. New self-employed people tend to spend the whole invoice and meet the bill in April. A simple set-aside habit avoids nearly all the pain.
US freelancer tax set-aside
A rough estimate for what to move on each invoice. Works in any currency.
What US freelancers pay
You owe regular income tax on your profit plus self-employment tax of 15.3%, made up of 12.4% for Social Security and 2.9% for Medicare. It generally applies to 92.35% of net earnings. The Social Security part stops above an annual wage base, and an extra Medicare tax can apply at high incomes. You can deduct half of your self-employment tax when you calculate income tax.
Quarterly estimates
If you expect to owe at least a set amount, the IRS expects payments through the year, usually due around April 15, June 15, September 15 and January 15 (they move when one lands on a weekend or holiday). Underpaying can lead to a penalty. Most states with an income tax have their own schedule.
Deductions worth tracking
- Home office, if you use the space regularly and exclusively for business.
- Business mileage, software, equipment and professional fees.
- Health insurance premiums, if you qualify.
- Retirement contributions through a SEP IRA or solo 401(k).
Keep records and receipts. Only deduct actual business costs. Your tax bill goes down by a fraction of each expense, so spending just for the deduction loses money.
A system that works
- Open a separate business account, and a separate savings account labelled “tax.”
- Each time you are paid, move a fixed percentage to tax savings immediately.
- Review actual profit each quarter and adjust.
- Hire a tax professional in your first year or when your income changes.
Other countries work differently. Canadians pay both CPP portions and may need installments. UK sole traders use self-assessment. Indian freelancers should check advance tax and presumptive schemes. Check your own revenue authority.