Confirm you have net self-employment income of $400 or more
The $400 threshold is for net income after expenses, not gross income. If you earned $10,000 but had $9,700 in expenses, your net is $300 and you don't owe self-employment tax. You still must report the income though.
Identify all sources of self-employment income: freelance, gig work, side business
Income from apps, online marketplaces, tutoring, consulting, and any independent contractor work all counts. You'll receive a 1099-NEC for payments of $600 or more, but all income is taxable regardless of whether you receive a form.
Determine your business structure: sole proprietor, single-member LLC, or partnership
Most freelancers and gig workers are sole proprietors by default. Single-member LLCs are also taxed as sole proprietors unless you elect S-corp status using Form 2553. Your structure affects which forms you file.
Get an EIN from the IRS if you haven't already
An EIN is free and takes 5 minutes to get at irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online. You need one if you have employees or a partnership. Sole proprietors can use their SSN but an EIN adds a layer of identity protection.
Track Income and Expenses
Set up a separate bank account for business income and expenses
Mixing personal and business funds makes tracking difficult and raises audit risk. Open a free business checking account and run all business transactions through it. This creates a clean paper trail.
Record all business income throughout the year, including cash and barter payments
Keep a running spreadsheet or accounting system. Even if a client doesn't send a 1099-NEC, the income is taxable. The IRS matches 1099s to returns, so unreported 1099 income almost always triggers a notice.
Track deductible business expenses with receipts and records
Common deductions include supplies, software subscriptions, professional development, business insurance, and mileage. The IRS standard mileage rate for 2025 is 70 cents per mile for business use.
Separate personal and business use for shared expenses like phone, internet, and vehicle
If you use your phone 60% for business, you can deduct 60% of the cost. Keep a usage log for at least one representative month. The IRS may disallow deductions without documented business-use percentages.
Save all 1099-NEC forms received from clients
Clients must issue 1099-NEC forms by January 31 for payments of $600 or more. If amounts don't match your records, contact the client for a corrected form before filing.
Complete Schedule C (Profit or Loss)
Report gross income on Schedule C, Line 1
Include all income from your self-employment activity, not just amounts reported on 1099s. This includes cash, checks, electronic payments, and the fair market value of any bartered goods or services.
Enter cost of goods sold on Line 4 if you sell physical products
COGS includes raw materials, direct labor, and manufacturing overhead. Service-based businesses usually skip this section. If your average annual gross receipts are $29 million or less, you can use the cash method.
Itemize business expenses in Part II (Lines 8-27)
The biggest deductions for most self-employed people are: advertising (Line 8), car expenses (Line 9), contract labor (Line 11), insurance (Line 15), office expenses (Line 18), and supplies (Line 22).
Calculate net profit or loss on Line 31
A net profit flows to Form 1040 Line 8 and is subject to both income tax and self-employment tax. A net loss can offset other income. If you show losses for 3 out of 5 years, the IRS may classify your activity as a hobby.
Calculate Self-Employment Tax (Schedule SE)
Transfer net profit from Schedule C to Schedule SE
Self-employment tax is 15.3% on the first $168,600 of net earnings (for 2025) — that's 12.4% for Social Security plus 2.9% for Medicare. Above $168,600, only the 2.9% Medicare portion applies.
Multiply net earnings by 92.35% to get your taxable self-employment income
The 92.35% factor (100% minus the 7.65% employer-equivalent portion) is built into Schedule SE. This mirrors the fact that employees don't pay FICA on the employer's share. It reduces your taxable base before the 15.3% rate applies.
Calculate the additional Medicare tax if applicable
An additional 0.9% Medicare tax applies to self-employment income above $200,000 (single) or $250,000 (married filing jointly). This is reported on Form 8959 and added to your total tax liability.
Deduct the employer-equivalent portion of self-employment tax on Form 1040
You can deduct 50% of your self-employment tax on Form 1040, Schedule 1, Line 15. This is an above-the-line deduction, meaning you get it even if you take the standard deduction. On $100,000 of SE income, this saves roughly $7,065.
Claim Additional Deductions for Self-Employed Filers
Deduct self-employed health insurance premiums on Schedule 1, Line 17
You can deduct 100% of health, dental, and long-term care premiums for yourself, your spouse, and dependents. This deduction can't exceed your net self-employment income. You can't take it for months you were eligible for an employer plan.
Deduct contributions to a SEP-IRA, SIMPLE IRA, or solo 401(k)
A SEP-IRA allows contributions of up to 25% of net self-employment earnings, maxing at $70,000 for 2025. A solo 401(k) allows up to $23,500 in employee deferrals plus 25% employer contributions, for a total of up to $70,000.
Consider the Qualified Business Income (QBI) deduction on Form 8995
The QBI deduction lets you deduct up to 20% of qualified business income. For 2025, the full deduction is available if taxable income is under $191,950 (single) or $383,900 (joint). Above those thresholds, limits apply based on your industry.
Deduct the business portion of your home if you have a dedicated workspace
The simplified method allows $5 per square foot, up to 300 square feet ($1,500 max). The regular method uses actual expenses proportional to your office's percentage of total home area. The space must be used regularly and exclusively for business.
File and Make Payments
Attach Schedule C and Schedule SE to your Form 1040
If you have multiple self-employment activities, file a separate Schedule C for each. All Schedule C net profits combine on a single Schedule SE. E-filing handles the attachment automatically.
Set up quarterly estimated tax payments for next year using Form 1040-ES
You must make estimated payments if you expect to owe $1,000 or more in tax. Quarterly due dates are April 15, June 15, September 15, and January 15. Underpayment penalties start at about 8% annually on missed amounts.
Pay any balance due by April 15
Use IRS Direct Pay at irs.gov/payments for free same-day payment. The failure-to-pay penalty is 0.5% per month on the unpaid amount, up to 25%. Filing on time but paying late is far cheaper than failing to file entirely.
Keep all business records, receipts, and bank statements for at least 3 years
The IRS recommends keeping records for 3 years from the filing date. However, if you underreported income by more than 25%, keep records for 6 years. Digital copies of receipts are acceptable if legible.
Frequently Asked Questions
How much is the self-employment tax rate?
The self-employment tax rate is 15.3% on net earnings — 12.4% for Social Security and 2.9% for Medicare. The Social Security portion applies only to earnings up to $168,600 (2024 limit). An additional 0.9% Medicare surtax kicks in on earnings above $200,000 for single filers or $250,000 for married filing jointly. You can deduct 50% of the self-employment tax from your adjusted gross income. Tax laws change frequently — verify current rules with the IRS or a tax professional.
At what income level do I owe self-employment tax?
You owe self-employment tax if your net earnings from self-employment reach $400 or more in a tax year. This threshold is much lower than the standard filing requirement for W-2 income. Net earnings means your gross income minus allowable business expenses — so if you freelanced and earned $1,000 but had $700 in expenses, your $300 net falls below the threshold.
Can I reduce my self-employment tax with an S-Corp election?
Yes. By electing S-Corporation status (Form 2553), you pay yourself a reasonable salary subject to payroll taxes and take remaining profits as distributions that avoid the 15.3% self-employment tax. This strategy typically saves money once your net profit exceeds $40,000-$50,000 annually. The tradeoff is increased administrative costs — S-Corps require separate tax returns (Form 1120-S), payroll processing, and stricter bookkeeping.
Do I need to pay self-employment tax on rental income?
Standard rental income from real estate is generally not subject to self-employment tax. However, if you provide substantial services to tenants (like a bed-and-breakfast or short-term rental with hotel-like amenities), the IRS may classify the income as self-employment earnings. Real estate professionals who materially participate in their rental activities also face different rules. Tax laws change frequently — verify current rules with the IRS or a tax professional.
What is the difference between Schedule C and Schedule SE?
Schedule C reports your business income and expenses to calculate net profit or loss — it feeds into your Form 1040 and determines your income tax. Schedule SE takes that net profit figure from Schedule C and calculates your self-employment tax (Social Security and Medicare). You need both: Schedule C determines how much you made, and Schedule SE determines the additional payroll-equivalent tax you owe on those earnings.