Self-employment tax and quarterly estimated taxes, explained

What is self-employment tax?

Self-employment tax is the Social Security and Medicare tax for people who work for themselves. Employees have it withheld from their pay, with the employer paying a matching share; when you are self-employed, you pay both shares yourself.

• Rate: 15.3 percent, made up of 12.4 percent for Social Security and 2.9 percent for Medicare.
• Who pays: anyone with net earnings from self-employment of $400 or more, including sole proprietors, independent contractors and, by default, LLC members. Age does not matter, and it applies even if you already receive Social Security.
• Cap: the Social Security part applies only up to a yearly wage base, which counts your wages from a job too. The IRS publishes the amount each year; Medicare has no cap.
• Extra Medicare tax: an additional 0.9 percent applies once your wages and self-employment income together exceed $200,000 for a single filer, or $250,000 for married couples filing jointly.

You figure it on Schedule SE and file it with Form 1040, alongside Schedule C for your business profit. You can deduct the employer-equivalent part of your self-employment tax when calculating adjusted gross income, which lowers your income tax but not the self-employment tax itself.

Who has to pay quarterly estimated taxes?

Tax is due as you earn income, through withholding or estimated payments. The IRS says individuals, including sole proprietors, partners and S corporation shareholders, generally must make estimated payments if they expect to owe $1,000 or more when they file. Estimated payments cover income tax and self-employment tax together.

You do not have to pay estimated tax for the current year if you had no tax liability for the prior year, were a U.S. citizen or resident alien for the whole year, and that prior year covered 12 months. Use the worksheet in Form 1040-ES to work out the amount; the prior year's return is a useful starting point.

When are estimated taxes due in 2026?

If a due date falls on a Saturday, Sunday or legal holiday, a payment made on the next business day is on time. A mailed payment counts on its postmark date. You can also pay more often, weekly or monthly, as long as enough is paid by the end of each period.

Pay online through IRS Direct Pay or your IRS online account, by phone, from the IRS mobile app, through the Electronic Federal Tax Payment System, or by mail with a Form 1040-ES voucher.

How do I avoid the underpayment penalty?

The IRS says most taxpayers avoid the penalty if they owe less than $1,000 after withholding and credits, or if they paid at least 90 percent of the current year's tax or 100 percent of the prior year's tax, whichever is smaller. Higher-income taxpayers, farmers and fishers have special rules in Publication 505.

If your income arrives unevenly, for example a seasonal product business, the annualized income method on Form 2210 can lower or remove the penalty by matching payments to when you earned the money. A late payment can still draw a penalty even if you end up with a refund.

I have a job too. Can I cover it through withholding instead?

Yes. The IRS says employees can avoid estimated payments by asking their employer to withhold more: file a new Form W-4 and enter an extra amount on the line for additional withholding. Withholding counts toward both income tax and self-employment tax owed on your side business.

The IRS Tax Withholding Estimator helps you choose the amount. This is often the simplest route for a side business, and it is covered with the other practical questions in starting a business while employed.

What records should I keep?

The IRS lets you use any recordkeeping system that clearly shows income and expenses, and says to keep records as long as needed to prove the income or deductions on a return. Keep sales records, receipts, bank and card statements and mileage logs. If you take card or app payments, you may receive Form 1099-K; payment apps and marketplaces must send one when your payments for goods or services exceed $20,000 across more than 200 transactions, but you must report all business income whether or not you get one.

Business expenses lower both taxes, because self-employment tax is figured on net earnings. That includes the home office deduction if part of your home is used regularly and exclusively for the business and is your principal place of business.