The percentage depends on whether you are an employee or self-employed

If you are an employee, your employer withholds payroll taxes from your paycheck. You do not estimate or set aside a percentage yourself — your employer calculates it based on your W-4 form and sends it to the IRS. The amount withheld covers Social Security, Medicare, and federal income tax.

If you are self-employed (a sole proprietor, freelancer, or partner), you owe self-employment tax on your net business income. Self-employment tax is approximately 15.3% of your net earnings: 12.4% for Social Security and 2.9% for Medicare. You also owe federal income tax, which varies by your total income and tax bracket. Many self-employed people set aside 25% to 30% of their net business income to cover both self-employment tax and federal income tax combined.

State and local income taxes vary by location and add to the total. Some states have no income tax; others tax at rates between 2% and 13%. You should research your specific state and local rates before estimating.

Key Takeaways

  • Self-employment tax is 15.3% of net business income, split between Social Security (12.4%) and Medicare (2.9%).
  • Most self-employed people set aside 25% to 30% of net income to cover self-employment tax plus federal income tax combined.
  • State and local income taxes vary widely and must be added to your federal estimate based on where you live and work.
  • Employees do not estimate payroll taxes; their employer withholds the amount based on their W-4 form.
  • The percentage you set aside should be based on your net business income, not your gross revenue.

How self-employment tax is calculated

Self-employment tax applies to your net business income — the money left after you subtract business expenses from gross revenue. You do not pay self-employment tax on your gross income.

The calculation works like this: take your net business income, multiply it by 92.35% (this accounts for a deduction you can take), then multiply the result by 15.3%. That is your self-employment tax for the year. For example, if your net business income is $50,000, your self-employment tax is roughly $6,900.

You report self-employment tax on Schedule SE (Form 1040) when you file your tax return. If you expect to owe $1,000 or more in federal income tax and self-employment tax combined, you must make quarterly estimated tax payments to the IRS. These are due on April 15, June 15, September 15, and January 15.

Why 25% to 30% is a common estimate for self-employed people

The 15.3% self-employment tax covers only Social Security and Medicare. Federal income tax is separate and depends on your total income and filing status. For most self-employed people, federal income tax ranges from 10% to 24% of net income, depending on their tax bracket.

Adding self-employment tax (15.3%) and a typical federal income tax rate (10% to 12%) gives you roughly 25% to 27%. Setting aside 25% to 30% gives you a buffer for higher tax brackets, state taxes, or if your income is higher than expected. If you end up owing less, you receive a refund when you file your return.

This estimate assumes you have no other income and no major deductions beyond business expenses. If you have a spouse with W-2 income, rental property income, or significant itemized deductions, your actual rate may be lower.

State and local tax rates to add to your federal estimate

Nine states have no state income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only dividends and interest, not wages). If you live in one of these states, you only owe federal self-employment tax and federal income tax.

Other states tax income between 2% and 13%. California, Hawaii, New York, and Vermont have the highest rates. Some cities and counties also impose local income taxes on top of state tax. For example, New York City residents pay both state and city income tax.

To find your state rate, search "[your state] income tax rate" or visit your state's department of revenue website. Add that percentage to your federal estimate. For example, if you live in California (9.3% state tax) and estimate 27% federal, you should set aside roughly 36% of net income.

How to adjust your estimate if your income changes

Your estimate should be based on your expected net income for the year. If your business is seasonal or your income varies month to month, recalculate your estimate each quarter before making a payment. The IRS allows you to pay different amounts each quarter — you do not have to pay the same amount four times.

If you expect to earn significantly less than you did last year, a lower estimate prevents overpaying. If you expect to earn significantly more, a higher estimate helps you avoid penalties. You can adjust your estimate on Form 1040-ES, which the IRS provides free on its website.

If you underpay your estimated taxes by more than $1,000, the IRS may charge a penalty when you file your return. The penalty is small (usually under $100 for modest underpayments), but it is avoidable if you estimate reasonably and pay on time.

The difference between net income and gross revenue

Gross revenue is all the money your business brings in before expenses. Net income is what remains after you subtract business expenses: supplies, equipment, rent, utilities, insurance, vehicle costs, and other costs directly tied to running your business.

Payroll taxes are calculated on net income, not gross revenue. This is important because it means your actual tax bill is lower than it would be if calculated on your total revenue. For example, if you earn $100,000 in gross revenue but have $30,000 in business expenses, your net income is $70,000, and your self-employment tax is based on $70,000, not $100,000.

Keep records of all business expenses throughout the year so you can calculate your net income accurately when you file your return or make estimated payments.

Frequently Asked Questions

Do I have to make quarterly estimated payments?

You must make quarterly estimated payments if you expect to owe $1,000 or more in federal income tax and self-employment tax combined for the year. If you expect to owe less than $1,000, you can pay the full amount when you file your return. Payments are due April 15, June 15, September 15, and January 15.

What happens if I set aside too much or too little?

If you set aside too much, you receive a refund when you file your tax return. If you set aside too little and owe more than $1,000, you may owe a small underpayment penalty. Setting aside 25% to 30% of net income typically prevents underpayment penalties for most self-employed people.

Can I deduct the employer portion of self-employment tax?

Yes. When you calculate your adjusted gross income on your tax return, you can deduct half of your self-employment tax. This reduces your taxable income slightly. The IRS accounts for this on Schedule SE.

Does my spouse's W-2 income affect my self-employment tax estimate?

No. Self-employment tax is based only on your net business income. However, your spouse's W-2 income may affect your federal income tax bracket, which could change how much federal income tax you owe on your self-employment income. If you file jointly, you may want to consult a tax professional to estimate accurately.

What if I have multiple businesses or side income?

You calculate self-employment tax on the combined net income from all your self-employment activities. If you also have W-2 income from an employer, that does not count toward self-employment tax, but it does affect your federal income tax bracket and your overall estimated payment.