When you work for yourself, you pay both the employee and employer share of Social Security and Medicare taxes. That comes to 15.3% on net self-employment income, on top of your regular income tax. Many first-year freelancers are blindsided by this. Set aside 25-30% of every payment you receive until you know your actual tax bill.
That set-aside sounds steep until you see what it covers. At a W-2 job, your employer pays half of your Social Security and Medicare taxes and withholds your half before your paycheck arrives. You never see the money leave. Working for yourself, you get both halves of the bill, and nobody withholds a dime on your behalf.
The 15.3% breaks down to 12.4% for Social Security and 2.9% for Medicare. It’s charged on net earnings, the income left after business expenses. It kicks in once you net just $400 for the year, and you owe it even in years when your income tax bill is zero. The 25-30% guideline exists because self-employment tax is only part of the picture. Federal income tax stacks on top, and state income tax can push the total higher. Two things soften the blow: you can deduct the employer half when you calculate adjusted gross income, and the Social Security portion stops once earnings pass the annual wage base limit.
Make the set-aside automatic so it never feels optional. Open a separate savings account used only for taxes, and move the money the day each payment lands, before it starts looking spendable. Then send the IRS quarterly estimated payments. They’re due four times a year, and skipping them can trigger underpayment penalties even if you pay everything at filing time. Your first full tax return tells you your true rate. Adjust the percentage then.
Treat the set-aside as payroll withholding you run for yourself. The freelancers who get into trouble with the IRS usually aren’t the ones who couldn’t afford the tax. They’re the ones who spent it first.
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