Self-Employment Tax
- Nathan Harding
- Jul 25
- 4 min read
Updated: Jul 26
The Hidden Tax New 1099 Workers Need to Know
Congratulations on starting your self-employed journey! Whether you're freelancing, consulting, or running your own business, earning 1099 income is exciting. But there's one tax that catches most new self-employed folks off guard: self-employment tax.
If you've only worked as an employee before, you've never had to think about this tax because your employer handled it behind the scenes. Now that you're self-employed, it's your responsibility - and it can be a costly surprise if you're not prepared.
What Is Self-Employment Tax?
Self-employment tax is how self-employed individuals pay into Social Security and Medicare - the same programs that employees and employers fund together through payroll taxes.
When you were an employee:
You paid 7.65% of your wages (6.2% for Social Security + 1.45% for Medicare)
Your employer paid a matching 7.65%
Total: 15.3% went to Social Security and Medicare
Now that you're self-employed:
You pay the full 15.3% yourself
This is self-employment tax
How Much Will You Owe?
For 2025, you'll pay 15.3% self-employment tax on your net self-employment income up to $168,600 (the Social Security wage base). Above that amount, you'll still pay the 2.9% Medicare portion.
Example: If your net self-employment income is $50,000:
Self-employment tax: $50,000 × 15.3% = $7,650
That's on top of your regular income tax.
When Do You Pay?
Unlike employees who have taxes withheld from each paycheck, self-employed individuals typically pay quarterly estimated taxes. These are due:
Q1: April 15
Q2: June 15
Q3: September 15
Q4: January 15 (following year)
If you don't make quarterly payments and owe more than $1,000 at year-end, you may face penalties.
Getting this estimate right is the biggest challenge we see with new business owners. Or forsaking all estimates and getting charged penalties at the end of the year.
The Silver Lining
There is some good news:
1. Deduction for Half: You can deduct half of your self-employment tax as a business expense on your income tax return. Using our example above, you'd deduct $3,532.50 from your taxable income.
2. Business Expense Deductions: Unlike employees, you can deduct legitimate business expenses to reduce your net self-employment income.
3. Qualified Business Income Deduction (QBID): You may qualify for a 23% deduction on your business income (this doesn't reduce self-employment tax, but it helps with income tax).
Common Mistakes to Avoid
Not Setting Money Aside: The biggest shock comes when new self-employed folks spend all their 1099 income without saving for taxes. A good rule of thumb is to set aside 25-30% of your income for federal taxes (including self-employment tax).
Forgetting State Taxes: Don't forget about state income taxes, which vary by state.
Missing Quarterly Payments: Waiting until year-end to pay can result in penalties, even if you get a refund.
Poor Record Keeping: Track all income and expenses throughout the year. You'll need this information for tax filing and quarterly estimates.
Planning Ahead
Set Up a Tax Savings Account: Open a separate account and automatically transfer 25-30% of each payment you receive.
Track Everything: Use accounting software or at minimum, a spreadsheet to track income and expenses.
Consider Professional Help: Tax rules for self-employed individuals are complex. A tax professional can help you maximize deductions and stay compliant.
Make Quarterly Payments: Don't wait until year-end. Calculate and pay quarterly estimated taxes to avoid penalties.
The Bottom Line
Self-employment tax is a significant expense that many new 1099 workers don't see coming. At 15.3% of your net self-employment income, it can be a substantial hit if you're not prepared.
The key is planning ahead. Understanding this tax from day one allows you to:
Price your services appropriately
Set aside money throughout the year
Make quarterly payments to avoid penalties
Take advantage of available deductions
Remember, being self-employed comes with additional tax responsibilities, but also additional opportunities to reduce your tax burden through business deductions and tax planning strategies.
This article provides general information and should not be considered specific tax advice. Tax laws are complex and change frequently. Consult with a qualified tax professional for advice specific to your situation and reach out if you need help.
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