Self-employed and 1099 taxes

Part of Financial 101 › Tax. General information about US federal tax rules for tax year 2026, not tax advice. State rules differ. Figures come from IRS Revenue Procedure 2025-32 and IRS Notice 2025-67 and change yearly; the IRS is the source of truth. For your own situation, see when you need a CPA.

The surprise in year one

The first tax return after going freelance tends to hurt, and the reason is a tax most employees never see. An employee pays half of Social Security and Medicare tax and the employer pays the other half. When you are both, you pay both halves: self-employment tax, 15.3% of your net earnings (12.4% Social Security up to the annual wage base, plus 2.9% Medicare on everything). That is on top of income tax, and nothing is withheld from a 1099 payment to cover it. Half of it is deductible above the line, which softens the blow but does not remove it.

The practical consequence is that a contractor earning the same gross as an employee keeps less, and needs to price accordingly.

Quarterly estimated payments

With no withholding, the IRS expects you to pay as you go: four estimated payments due in April, June, September, and January. Underpay and there is a penalty, calculated like interest. The simplest way to avoid it is the safe harbour: pay in at least 100% of last year’s total tax (110% if your AGI was above a threshold), in equal quarterly instalments, and you owe no penalty regardless of what this year turns out to be. Then settle the difference in April.

Set aside a fixed percentage of every payment received into a separate savings account the day it lands. The right percentage depends on your bracket and state, but a third is a common starting point that leaves most people with a cushion rather than a bill.

What is deductible

Anything ordinary and necessary for the business. For a typical contractor that means software and subscriptions, equipment and its depreciation, professional fees, a share of phone and internet, business travel and mileage, education that maintains your skills, and a home office if a space is used regularly and exclusively for work. The simplified home-office method allows a flat rate per square foot up to 300 square feet; the actual-expense method deducts a proportional share of rent or mortgage interest, utilities, and insurance, and usually yields more for larger spaces.

Two more that people miss. Health insurance premiums are deductible above the line for the self-employed if you are not eligible for an employer plan through a spouse. And the qualified business income deduction lets many sole proprietors deduct up to 20% of business profit, subject to income thresholds and other limits; the 2025 law made it permanent.

What is not deductible: clothes you could wear elsewhere, commuting from home to a regular workplace, meals alone, and the personal share of anything mixed-use. Keep records for all of it. The deduction is only as good as the receipt.

The retirement plans that change the picture

Self-employed people have access to retirement accounts with far higher limits than an IRA, and using them is the single biggest tax lever available.

Plan	2026 maximum	How it works
SEP IRA	Up to $72,000	Employer-only contribution, roughly 20% of net self-employment income. No catch-up. Can be opened and funded up to the filing deadline including extensions.
Solo 401(k)	Up to $72,000 ($80,000 age 50+; $83,250 ages 60–63)	Employee deferral of $24,500 plus an employer contribution of roughly 20% of net income. Reaches the maximum at a lower profit level than a SEP; Roth deferrals usually allowed.

For most owner-only businesses the solo 401(k) allows more at the same income and is worth the slightly more paperwork. Either plan turns a large share of profit into a deduction and into index funds at the same time.

Entity choices, briefly

A single-member LLC changes your liability exposure, not your taxes; it is still reported on Schedule C. An S-corporation election can reduce self-employment tax by splitting income into salary and distributions, at the cost of payroll, a separate return, and the requirement that the salary be reasonable. The threshold where this makes sense depends on profit and state, and it is exactly the decision to take to a CPA rather than a blog.

Common mistakes

Not saving for the tax bill. Missing quarterlies and paying the penalty. Mixing business and personal accounts, which makes records a nightmare. Skipping the retirement plan because it seemed complicated. Deducting things that are not deductible on the theory that nobody checks.

Checklist

Separate business bank account and card · Fixed percentage of every payment moved to a tax savings account · Quarterly estimates calendared, safe-harbour amount known · Expense records kept as you go · Home office measured and documented if claimed · SEP or solo 401(k) opened · Health insurance deduction claimed if eligible · S-corp question raised with a CPA once profit is meaningful.

Related: How deductions work · Passive income, honestly assessed · When you need a CPA