Freelancer taxes: quarterly estimated payments and how much to set aside

Short answer: freelancers in the US pay income tax and self-employment tax, and since no employer withholds it, they usually pay estimated tax four times a year, around April 15, June 15, September 15 and January 15. Self-employment tax is 15.3% of 92.35% of your net earnings, covering Social Security and Medicare. A practical habit is to move a fixed share of every payment, often 25 to 30%, into a separate tax account the day you are paid. Check your own rate with a tax professional.

What taxes do freelancers pay?

• Income tax. Federal, and in most states, state income tax, on your net profit (income minus allowed business expenses).
• Self-employment tax. This is your Social Security and Medicare contribution. Employees split it with an employer; you pay both halves. The rate is 15.3% (12.4% Social Security up to an annual earnings cap plus 2.9% Medicare), applied to 92.35% of your net earnings. High earners can owe an extra Medicare tax above certain thresholds.
• A deduction for half of it. You can deduct one half of your self-employment tax when working out your income tax.

Example: net earnings of $60,000. Self-employment tax is $60,000 x 92.35% x 15.3%, about $8,478. Half of that, about $4,239, reduces your taxable income. Your income tax comes on top, based on your bracket and deductions.

When are estimated payments due?

When a date falls on a weekend or holiday, the deadline moves to the next business day. The periods are uneven, which surprises many people: the second payment covers only two months. You can pay online through the IRS, and most states have their own system.

How do you avoid an underpayment penalty?

You generally owe a penalty if you underpay by $1,000 or more and have not met a safe harbor. The usual safe harbors are to pay at least 90% of this year's tax, or 100% of last year's total tax (110% if last year's adjusted gross income was above $150,000). Paying 100% of last year's tax is popular with freelancers whose income is rising, because you know the number in advance, even if you end up owing more when you file. Rules can change, so confirm the current thresholds.

How much should you set aside?

Many freelancers start with 25 to 30% of each payment, then adjust. The right figure depends on your profit, filing status, state and deductions. A simple way to make it automatic:

1. Open a separate savings account for taxes.
2. The day a payment arrives, move your chosen percentage into it.
3. Pay each quarterly estimate from that account, and leave the rest of the money for your living costs and business.

If your income is uneven, setting aside a percentage of each payment, instead of a fixed monthly amount, keeps you covered in good months and lean ones alike. Our Freelancer Cash and Tax Buffer report turns your last twelve months of income into a tax set-aside, a cushion sized to your income pattern and a steady monthly pay.

What can you deduct?

• Business expenses. Software, equipment, supplies, professional fees, a portion of phone and internet, and travel for work. Keep receipts and records.
• Home office, if part of your home is used regularly and only for business, under the IRS rules.
• Self-employed health insurance premiums, often deductible, subject to limits.
• Retirement contributions. A SEP IRA or solo 401(k) lets self-employed people save a larger share of income than a regular IRA, and reduces taxable income. See the tax-advantaged account order report and Roth vs traditional IRAs.
• The qualified business income deduction, which can reduce taxable income for many sole proprietors, subject to limits.

Common mistakes

• Spending the tax money. If it sits in your main account, it will drift into everyday spending.
• Forgetting state tax. Most states tax income, and many have their own estimated payment dates.
• Missing the first payment of the year. It covers the busiest months and is due in April, which is easy to overlook.
• Mixing personal and business money. A separate business account makes records and deductions much easier.
• Having no cushion for lean months. A tax bill and a slow month at once is how freelancers fall behind. See how many months of emergency fund you need, and remember an uneven income argues for more.

General education about US federal rules, not tax advice. Tax laws, thresholds and deadlines change, and your situation may differ. Confirm with the IRS or a qualified tax professional.

Frequently asked questions