The Complete Guide to Self-Employment Taxes

Who counts as self-employed

Sole proprietors, single-member LLC owners, general partners, gig workers, and anyone paid on a 1099-NEC instead of a W-2. The label on your paperwork does not control: if you set your own hours, use your own tools, and can profit or lose on the work, the IRS treats you as self-employed. A side business on top of a W-2 job still generates SE tax on the side income. If a company treats you as a contractor but controls your work like an employee, that is a misclassification issue worth raising before it becomes a tax problem.

Schedule C mechanics

Income and expenses from self-employment go on Schedule C. Net profit flows to Schedule SE (which calculates SE tax) and Schedule 1 (which feeds into AGI on the main 1040). Every ordinary and necessary business expense reduces the profit that both taxes are computed on: supplies, advertising, contract labor, software, business mileage, insurance, and professional fees all count. A separate business bank account is not legally required for a sole proprietor, but it makes Schedule C dramatically easier to prepare and far easier to defend.

The deduction for half of SE tax

You deduct half of SE tax (the 'employer portion') as an above-the-line adjustment. This deduction goes on Schedule 1 and reduces your AGI, not just your taxable income. The logic is parity: employers deduct the payroll tax they pay for employees, so you get to deduct the employer half you pay for yourself. Note that it reduces income tax only; it does not reduce the SE tax itself.

The QBI deduction

Most self-employed people also qualify for the qualified business income deduction, worth up to 20% of net business income on top of everything above. It phases down for higher earners in specified service fields (health, law, accounting, consulting, financial services, and similar), and legislation passed in 2025 made the deduction permanent. It comes off taxable income automatically when the return is prepared correctly, but it changes the math on almost every planning decision, including whether an S-corp election helps.

Quarterly estimates

Because there's no employer withholding, you make quarterly estimated payments on Form 1040-ES. Due April 15, June 15, September 15, January 15. Safe harbor is 90% of current or 100% of prior year (110% if prior AGI was over $150K). Miss the safe harbor and the IRS charges an underpayment penalty computed quarter by quarter, so catching up in December does not fully erase a shortfall from April. If your income lands unevenly across the year, the annualized installment method matches payments to when the money actually arrived. Florida has no personal income tax, so Florida residents only deal with the federal side.

Deductions self-employed people miss

The ones that come up over and over in returns we review:

• Self-employed health insurance premiums, deductible above the line
• Half of SE tax (software catches this, but amended prior-year returns often missed it)
• Retirement plan contributions (Solo 401(k), SEP-IRA)
• Business mileage with a contemporaneous log
• Home office, for space used exclusively for the business
• The business-use share of phone and internet
• Software subscriptions, professional dues, and continuing education in your field

S-corp election as SE tax savings

Electing S-corp treatment splits your income into reasonable salary (SE/payroll tax applies) and distributions (no SE tax). Typical break-even is around $45,000 to $60,000 in net income. Below that, the added costs eat the savings: payroll processing, a separate 1120-S return, and cleaner bookkeeping are all mandatory once you elect. Above it, the payroll tax saved on the distribution share usually outruns the overhead. The salary has to be defensible, which is its own topic; see our reasonable salary guide.

Retirement plan options

Self-employed retirement accounts let you defer substantial income, and for high earners they are usually the single largest deduction available:

• Solo 401(k): up to $70,000 total (2025), Roth option available
• SEP-IRA: up to 25% of net SE earnings, capped at $70,000 (2025)
• SIMPLE IRA: up to $16,500 employee + 3% match
• Defined benefit: can exceed $300K/year at older ages and high income

Records that hold up

Keep a mileage log as you go, not reconstructed in April. Keep receipts or clear bank records for every expense category on Schedule C. Income is taxable whether or not a 1099 arrives; Congress restored the higher 1099-K reporting threshold in 2025, which means fewer forms for casual sellers, but the reporting form was never what made income taxable. Clean records turn most IRS questions into a one-letter exchange instead of an audit.