Self-Employed & Small Business

The financial mechanics of working for yourself

Self-employment changes the financial picture in ways most W-2 workers don't think about until they're in it. Self-employment tax adds 15.3% on top of regular income tax (representing both the employer and employee portions of Social Security and Medicare). Quarterly estimated payments replace the automatic withholding that came with paychecks. Retirement options become more generous, but only if you set up the accounts and contribute deliberately — nothing happens automatically.

Irregular income makes traditional budgeting tools awkward. A budgeting framework that assumes "this is my monthly income" doesn't fit a freelancer or business owner whose income varies 3× across months. The fix is usually to pay yourself a regular salary from the business — even informally — and to keep one to three months of operating expenses in a separate account to absorb the variance.

Quarterly estimated taxes are not optional

If you expect to owe more than $1,000 in tax for the year, the IRS expects quarterly estimated payments — due in April, June, September, and January (of the following year). Underpayment triggers penalty interest, which is relatively modest but adds up. Most self-employed people use the prior year's tax bill divided by four as a safe-harbor minimum.

A simple working rule: set aside roughly 30% of every payment received in a separate tax savings account. That covers federal income tax, self-employment tax, and most state income tax for moderate earners. Higher earners need a larger reserve; lower earners may set aside less.

Retirement options for the self-employed are unusually generous

SEP-IRA: simplest. Contribute up to 25% of net self-employment earnings, with an annual cap. Best for sole proprietors with no employees who want minimum paperwork.

Solo 401(k): allows both employee deferrals and employer contributions, which lets you contribute more than a SEP at the same income level. Better for higher earners who want to maximize. Allows Roth contributions (a SEP doesn't, traditionally). Slightly more setup, but most major brokers offer one with minimal cost.

An HSA, if you have a high-deductible health plan, is the most tax-advantaged account available — deductible going in, tax-free growth, tax-free withdrawals for medical. The self-employed can pair it with self-purchased coverage on the ACA marketplace.

Deductions worth knowing about

Home office: requires a space used regularly and exclusively for business. The simplified method ($5 per square foot, up to 300 sq ft) avoids most paperwork; the actual-expense method can be larger but requires tracking.

Mileage: business miles can be deducted at the IRS standard rate or as actual expenses. A simple log app pays for itself.

Self-employed health insurance premiums are deductible above the line (not on Schedule A), which is one of the more impactful benefits of self-employment.