How much to set aside for taxes when you're self-employed

By Nicolas StrautPublished Aug 11, 202610 min read

Key takeaways

The federal amount to set aside for taxes runs from roughly 17% of net profit at $40,000 up to roughly 26% at $200,000, not a flat 25% to 30% rule of thumb.
How much to set aside for taxes starts with your net profit, not your gross revenue, and then follows your income level to the percentage in the table below instead of a flat rate.
How much to set aside for taxes is easiest to pin down from last year's tax bill rather than a percentage: pay 100% of it, or 110% above $150,000 of AGI, divided by four.

In this article

Do you pay self-employment taxes on gross or net income?
What percentage should you set aside?
What affects how much you owe for taxes?
Should you use last year's tax bill instead of a percentage?
Percentage method vs. last year's tax bill: which should you use?
Where should you keep your tax money?
Frequently asked questions about how much to set aside for taxes
Related posts

Most self-employed people should set aside 15% to 30% of their net profit, not their gross revenue, for federal taxes. The right number inside that range depends on how much you earn: roughly 17% at $40,000 of net profit and roughly 26% at $200,000. State tax stacks on top.

Do you pay self-employment taxes on gross or net income?

You pay self-employment taxes, and federal income tax, on net income, always, not gross: net profit is your Schedule C revenue minus deductible business expenses, not the amount that lands in your bank account. That distinction matters more for some businesses than others: a consultant running 10% expenses barely notices it, while a reseller or contractor buying materials at 55% of revenue would reserve nearly double what they actually owe working off the gross figure.

Software subscriptions, a home office allocation, marketing spend, and subcontractor fees all lower the net profit your tax is based on, which is why tracking them properly is worth the effort before you ever get to a percentage. The Keeper Tax review looks at what an automated expense tracker does and doesn't catch. A full deductions list belongs on its own page, planned but not yet live. Worth naming directly since it's checkable: the page currently ranking first for "how much should self-employed set aside for taxes" never says whether its 25% to 30% figure is gross or net.

What percentage should you set aside?

Set aside between 15% and 30% of net profit, and where you land inside that range moves with income. At $40,000 of net profit, the real federal figure runs closer to 17%; at $200,000, it runs closer to 26%, before any state tax at all.

Net Schedule C profit	Self-employment tax	Federal income tax	Total federal	Set-aside % of net profit
$40,000	$5,651.82	$1,320.89	$6,972.71	17.4%
$60,000	$8,477.73	$3,071.34	$11,549.07	19.2%
$80,000	$11,303.64	$4,821.78	$16,125.42	20.2%
$100,000	$14,129.55	$7,215.75	$21,345.30	21.3%
$150,000	$21,194.32	$15,238.62	$36,432.95	24.3%
$200,000	$28,234.30	$23,745.88	$51,980.18	26.0%

What does this table assume?

The table assumes a single filer taking the standard deduction, with no other income, no dependents, no credits, no W-2 income, and no state tax, using a flat 20% QBI deduction with no phase-out modeled. It doesn't account for self-employed health insurance or retirement contributions, both of which would push the real number lower than what's shown here.

Why does the reserve rate climb with income?

The reserve rate climbs with income because two flat pieces shrink as a share of profit: self-employment tax runs 15.3% on 92.35% of net profit, about 14.1% of profit until the wage base is reached, with half of it coming back as an above-the-line deduction.¹ The standard deduction, $16,100 single or $32,200 married filing jointly, removes a fixed slice off the top, which is why low earners land so far under 25%, and the 20% qualified business income deduction removes another fifth of net profit off the top as well.²

Why does the rate flatten near $200,000?

The rate flattens near $200,000 for a simple reason: the Social Security portion of self-employment tax stops at $184,500 of net earnings in 2026, a threshold a sole proprietor reaches at about $199,783 of net profit. Above that only the 2.9% Medicare tax keeps running, plus 0.9% more under the Additional Medicare Tax,³ so the total effective rate's climb slows sharply rather than continuing at the same pace. For the self-employment tax portion alone at your own income level, run the self-employment tax calculator.

Tax year

Filing status

State

W-2 wages (if any)

Reduces how much SE income is still subject to Social Security

Expected 2026 net self-employment income

Net profit: gross 1099 income minus business expenses. A net loss is fine. Enter it as a negative number.

Federal withholding already taken from W-2 wages

Credited toward your target before splitting the remainder into quarters

Prior-year total federal tax liability

Enables the safe-harbor method alongside the current-year estimate

Was your income roughly even across the year?

How this is calculated

Method 1, safe harbor: 100% of your prior year's total tax liability (110% if your prior-year AGI exceeded $150,000, or $75,000 if married filing separately), divided by four. This method fully protects you from an underpayment penalty no matter how your current year turns out.

Method 2, current-year estimate: net self-employment income × 92.35% for net earnings, then 12.4% Social Security (capped at the wage base, net of any W-2 wages) plus 2.9% Medicare (uncapped) plus 0.9% Additional Medicare Tax above your filing-status threshold. Income tax applies the current year's brackets to (net income − half of SE tax − standard deduction − 20% QBI deduction). The target is 90% of that combined total, with any W-2 withholding credited, and the remainder is divided by four.

The income tax figure above, with your current numbers substituted in:

$0 net SE income = $0 gross income
$0 − $0.00 SE tax deduction − $16,100 standard deduction − $0.00 QBI deduction = $0.00 taxable income
$0.00 taxable income run through the 2026 brackets = $0.00 income tax

The QBI deduction here is a flat 20% simplification. It doesn't model the §199A phase-out or specified-service-trade limits at higher incomes.

A net loss (net self-employment income entered as a negative number), $0 net income, and net earnings under the $400 Schedule SE filing threshold all correctly zero out self-employment tax. None of these reduce the income tax owed on any W-2 or other income the way a real return would, so Method 2 above shows nothing to estimate in those cases rather than modeling that offset. Method 1 (safe harbor) is unaffected, since it's based on your prior year, not this one.

Your numbers never leave your browser.

This is an estimate, not tax advice. Consult a professional about your specific situation.

Your inputs stay in your browser. This is an estimate, not tax advice.

What affects how much you owe for taxes?

The table above assumes a single filer with no other income, in a state with no income tax, and almost nobody is all three of those things. Three things move the number in either direction: your state, a W-2 job in the household, and retirement contributions.

Do you owe state tax on freelance income?

You owe state tax on freelance income in 41 states, where it stacks on top of the federal number above; in nine states, you don't.⁴ Nine states take nothing from self-employment income: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming, though New Hampshire's interest and dividends tax was fully repealed in 2025 and Washington taxes long-term capital gains but not wage or self-employment income. If you're in a flat-rate state, add that rate to the federal table almost directly; in California or New York, run the estimator instead of guessing.

State	2026 rate	Note
Pennsylvania	3.07% flat
North Carolina	3.99% flat	Down from 4.25% in 2025
Massachusetts	5.00% flat	Plus a 4% surtax above $1,107,750
California	1.0% to 12.3%	Plus a 1% Behavioral Health Services Tax above $1M, a 13.3% top rate
New York	3.90% to 10.90%	NYC residents add 3.078% to 3.876%; MCTMT adds up to 0.60% above $150,000 of net earnings in the MCTD

Does W-2 withholding cover your freelance taxes?

W-2 withholding sometimes covers your freelance taxes entirely, sometimes not at all, and occasionally it leaves you further short than you'd expect. Household W-2 income sits underneath your freelance income and can push it into a higher bracket than a standalone calculation shows, but going the other direction, W-2 withholding is deemed paid in four equal parts across the year under Section 6654(g) and can just as easily absorb the whole liability.⁵ One Form W-4 Step 4(c) change can replace four quarterly payments for a freelancer with a W-2 spouse; see the safe harbor tax rules guide for the same mechanic as a penalty cure.

Do Solo 401(k) contributions lower your taxes?

Yes, but Solo 401(k) contributions only lower half of what you owe: a deductible retirement contribution lowers the income tax side of the calculation and does nothing to the self-employment tax side, since SE tax is computed on net earnings before the contribution comes out. At $100,000 of net profit, a $20,000 Solo 401(k) or SEP IRA contribution, on the same mechanic, takes the reserve rate from about 21% down toward the high teens, all of it out of the income tax column. But only if the contribution actually happens: reserve at the unadjusted rate until the money is actually in the account.

Dedicated Solo 401(k) and SEP IRA guides are planned but not yet live.

Should you use last year's tax bill instead of a percentage?

If you filed a return last year, yes, use last year's tax bill instead of a percentage, because it swaps a guess for a known number. Line 24 of last year's Form 1040 gives you a target that isn't an estimate at all.

Pay 100% of it, or 110% if your prior-year AGI was above $150,000 ($75,000 married filing separately), and the IRS can't assess an underpayment penalty regardless of what you end up owing. Divide by four and that's your quarterly number, due on the same quarterly tax due dates as everyone else. If you mail those payments rather than sending them electronically, the vouchers and the worksheet behind that number both sit on Form 1040-ES. See how to calculate quarterly taxes for the full worked chain from profit to that number, and the safe harbor rules guide for the full decision tree.

Percentage method vs. last year's tax bill: which should you use?

Both methods protect you from a penalty, but they don't fit every situation the same way. The one that fits depends on how stable your income actually is.

When the percentage method works better

The percentage method wins when you don't have a prior-year return to lean on: a first-year business, or a sharp swing in income, makes last year's number meaningless. It also holds up better when this year's profit is falling, since the table tracks your actual current income instead of a stale prior-year figure. Run your own number through the estimator rather than assuming the table's midpoint fits you.

When last year's tax bill method works better

Last year's tax bill works better once your income is stable or rising, since hitting 100% or 110% of a known number guarantees no penalty no matter how this year turns out. It also removes the guesswork of estimating net profit before the year is over. The tradeoff is the same one covered above: it can overshoot what you actually owe if income drops.

Where should you keep your tax money?

Keep your tax money in a separate account at a different institution from your operating account, with no debit card and no app shortcut tempting you to dip into it. It's the one thing most competing guides do cover, and it works.

A high-yield savings account or a Treasury money market fund produces real interest on a quarterly balance of several thousand dollars. Two things are worth knowing that most guides skip: the interest itself is taxable, so reserve against it too, and Treasury interest is exempt from state tax, worth real money in California or New York and nothing in Texas. Keep it liquid enough to hit four fixed dates a year, and know that a freelancer with substantial investment income may also owe the 3.8% net investment income tax on top of this page's numbers.

Frequently asked questions about how much to set aside for taxes

Should I move money to my tax account from every client payment, or once a month?

Moving a fixed percentage out with every client payment is the more reliable habit, since it never requires you to have cash on hand at month end. A monthly sweep works too, as long as it happens before you've spent the money.

Can I be penalized for not saving enough in my first year?

A penalty can't be assessed for your first year if your total tax was zero for a full 12-month prior year and you were a US citizen or resident throughout. That exemption is narrow, though: it doesn't apply if you filed a return last year showing any tax at all.

Does money saved for taxes count as a business expense?

No, money held back for taxes isn't a business expense and doesn't reduce your net profit. Income tax and self-employment tax are personal liabilities paid out of profit, so moving cash into a reserve account changes nothing on Schedule C.

Should I set aside taxes before or after paying myself?

Set the tax money aside first, before you take an owner's draw. An owner's draw isn't a deductible expense and doesn't change what you owe, so paying yourself first just means your tax reserve ends up competing with money you've already spent elsewhere in the business.

Do I owe tax on money a client hasn't paid me yet?

You owe tax when the money arrives, not when you invoice. Almost every freelancer files cash basis, meaning income counts in the year you actually receive it, so an invoice sent in December and paid in January belongs to next year.

When should I adjust my tax savings mid-year?

Adjust when your run rate moves enough to change your bracket, typically a swing of 25% or more in either direction, or when a single large project lands. Re-run the estimator with your revised full-year profit rather than nudging the percentage by feel.

About the author

Nicolas Straut

Personal and business finance writer, former Forbes contributor

Nicolas Straut writes about self-employment and quarterly tax, LLC formation and costs, and tax software for Solvent. He has spent eight years writing about money and building content for fintech companies.