Self-employment tax: Filing, paying, and staying current

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No surprises at tax time.

© Jakub Krechowicz, © Stone's Throwe Photo/stock.adobe.com; Photo illustration Encyclopædia Britannica, Inc.

You’ve started your own business and kept track of your income and expenses. Now it’s time to use that information to make estimated tax payments, complete your tax return, and meet other filing requirements. You can, of course, turn all your documents over to a paid tax preparer. But even if you don’t do the tax work yourself, understanding the ins and outs and the forms required can help you run your business even better.

The Internal Revenue Service requires self-employed individuals with $400 or more in net earnings from self-employment to file an annual income tax return. Once you’ve tracked your income and expenses—either manually or by using accounting software—use Schedule C to calculate the net profit or loss from your business. Your net profit (and typically your net loss) is then reported on Form 1040.

Most sole proprietors don’t need an employer identification number (EIN) unless they hire employees or owe certain excise taxes. Still, you may choose to get one to open a business bank account, keep your Social Security number off business documents, or meet state requirements. You can apply for one for free through the IRS EIN application.

For an overview of small business tax responsibilities, see IRS Publication 583, which explains general filing and recordkeeping requirements.

All income related to your business must be reported on Schedule C, including:

Refunds you issue for returned or defective products are reported as sales returns on Schedule C. Discounts you give instead of refunds are reported as sales allowances (line 2).

If you purchase materials to make products, such as baked goods, crafts, or jewelry, you can deduct the cost of those materials from your sales revenue. Larger businesses—those with average annual gross receipts above $31 million over the prior three tax years for 2025 (indexed for inflation)—must calculate the cost of goods sold starting with the value of inventory at the beginning of the year, adding purchases made during the year, and subtracting the value of inventory at year’s end.

Small business taxpayers may use a simplified method that allows materials purchased and used in the same year to be treated as the cost of goods sold for that year. The materials must be used during the tax year and not include office supplies, equipment, or personal items. If you don’t sell products, you generally don’t need to calculate the cost of goods sold.

As a business owner, you may qualify for additional deductions on Schedule C, including the home office deduction and other common business expenses.

If you’re self-employed, you still contribute to Social Security and Medicare through self-employment tax. This tax is the equivalent of the payroll taxes employees and employers pay and is calculated on Schedule SE.

Self-employment tax consists of 12.4% for Social Security (applied up to the annual Social Security wage base) and 2.9% for Medicare on all net earnings. For 2025, the Social Security wage base is $176,100; for 2026, it’s $184,500. An additional 0.9% Medicare tax applies above certain income thresholds ($200,000 for single filers, $250,000 for those married filing jointly, and $125,000 for those married filing separately). If your net earnings are less than $400, you generally owe no self-employment tax.

Because you pay both the employer and employee portions—effectively double what employees see withheld from their paychecks—half of the self-employment tax is deductible on Form 1040.

If you are self-employed and expect to owe at least $1,000 in total tax when you file, you generally must make quarterly estimated tax payments. Use Form 1040-ES to calculate and submit those payments.

Start with your expected adjusted gross income (AGI), subtract your estimated deductions, and calculate your income tax. Reduce that amount by any nonrefundable credits. Then add self-employment tax and other taxes owed. After subtracting refundable credits—such as the earned income tax credit (EITC), the additional child tax credit, or the refundable portion of the American opportunity credit—the result is your total estimated tax.

To determine your required annual payment, calculate 90% of your current year’s estimated tax and compare it with 100% of your prior year’s tax. Generally, you must pay the smaller of those two amounts to avoid a penalty. Divide that amount by four to determine your quarterly payments. If you expect to owe less than $1,000, you aren’t required to make estimated payments.

If you or your spouse have a job where taxes are withheld from your paycheck, you can increase withholding on Form W-4 to cover your business taxes instead of making separate estimated payments.

Although Form 1040-ES includes vouchers for mailing in your payment, the IRS strongly encourages taxpayers to pay electronically and is working to reduce reliance on checks and money orders.

Starting your own business can feel overwhelming, but if you understand the filing requirements and keep good records of your income and expenses, you can handle your taxes yourself or with the help of a preparer.

Be sure to pay enough to cover both income tax on your business profits and self-employment tax, whether through estimated payments or withholding. The goal is simple: Pay what you owe throughout the year so you don’t face surprises when you file your return.