The percentage depends on whether you are an employee or self-employed

If you are an employee, your employer withholds payroll taxes from your paycheck automatically. You do not estimate a percentage — the withholding is calculated based on the W-4 form you filled out when you were hired. The amount comes out before you see your pay.

If you are self-employed (a sole proprietor, freelancer, or independent contractor), you owe the full amount yourself and must set aside money throughout the year. This is where estimation matters. Self-employed people typically need to set aside between 25% and 30% of their net business income for federal income tax, Social Security tax, and Medicare tax combined.

The exact percentage varies based on your income level, filing status, and whether you have other income. A higher income can push you into a higher tax bracket, raising the percentage you owe. State income tax, where it exists, adds another layer on top of the federal amount.

Key Takeaways

  • Self-employed people should set aside 25% to 30% of net business income for all payroll and income taxes combined, though the exact amount depends on your tax bracket and state.
  • Self-employment tax (Social Security and Medicare) is a fixed 15.3% of net earnings, but you can deduct half of it from your income before calculating federal income tax.
  • Federal income tax withholding varies by income and filing status, so you may owe more or less than the self-employment tax portion alone.
  • Employees do not estimate — their employer withholds the correct amount based on their W-4 form.
  • Quarterly estimated tax payments are due four times per year if you are self-employed and expect to owe $1,000 or more in taxes.

How self-employment tax breaks down

Self-employment tax covers Social Security and Medicare. The rate is 15.3% of your net self-employment income: 12.4% for Social Security and 2.9% for Medicare. However, you can deduct half of this amount (7.65%) from your income before you calculate how much federal income tax you owe, which lowers your overall tax bill slightly.

This 15.3% is a fixed floor. Every self-employed person pays it on their net earnings. The variation in total tax owed comes from federal income tax on top of this amount.

To find your net self-employment income, start with your gross business income and subtract business expenses (supplies, equipment, rent, utilities, and so on). Self-employment tax is calculated on this net figure, not your gross revenue.

Federal income tax withholding for self-employed people

Federal income tax is not a flat percentage — it depends on your tax bracket, which is determined by your total income and filing status. The IRS publishes tax tables each year showing the brackets. For 2024, federal income tax ranges from 10% to 37% depending on how much you earn and whether you file as single, married filing jointly, or another status.

Most self-employed people in the lower and middle brackets owe somewhere between 10% and 24% in federal income tax alone. Add the 15.3% self-employment tax (minus the deductible half), and your total often lands in the 25% to 30% range.

If you are unsure of your bracket, the IRS website has a tax bracket lookup tool, or you can use last year's tax return as a rough guide. If your income has changed significantly, your percentage will shift.

State income tax adds to the total

Forty-one states and the District of Columbia have a state income tax. The rate varies widely — from about 1% in some states to over 13% in others. Nine states (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire) have no state income tax on wages or business income.

If you live in a state with income tax, add that percentage to your federal estimate. For example, if you owe 28% in federal taxes and your state rate is 5%, you should set aside roughly 33% of your net income.

Some states also tax self-employment income differently than wages, so check your state's tax department website or speak with a tax preparer familiar with your state's rules.

How to calculate your own estimate

Start with your projected net business income for the year (gross revenue minus business expenses). Multiply this by your estimated federal tax bracket percentage — use your prior year's return as a guide, or look up the current year's brackets on the IRS website.

Next, calculate self-employment tax: multiply your net income by 0.153 (15.3%). Then subtract half of that amount (0.0765) from your net income before calculating federal tax, since that portion is deductible.

Add your state income tax percentage if applicable. The total is the percentage you should set aside each month or quarter.

If your income is uneven throughout the year, set aside a percentage of each payment you receive rather than trying to estimate a lump sum at year-end. This spreads the burden and reduces the risk of owing a large amount when taxes are due.

Quarterly estimated tax payments

If you are self-employed and expect to owe $1,000 or more in federal taxes for the year, the IRS requires you to make quarterly estimated tax payments. These are due on April 15, June 15, September 15, and January 15 of the following year.

You can pay online through the IRS website (IRS.gov), by mail using Form 1040-ES, or through your bank's bill pay system. The IRS also accepts payments by phone and credit card, though credit card payments include a processing fee.

If you miss a quarterly payment, you may owe a penalty and interest when you file your annual return. However, if you underpay slightly, the penalty is usually small — the IRS is more concerned that you are making a good-faith effort to pay throughout the year rather than waiting until April.

Adjusting your estimate if income changes

If your business income drops or rises significantly partway through the year, you can adjust your remaining quarterly payments. For example, if you had a strong first half but expect a slow second half, you can lower your third and fourth quarter payments.

Conversely, if business picks up unexpectedly, increase your remaining payments to avoid a large bill at tax time. The IRS allows you to recalculate based on actual income to date, so you are not locked into your initial estimate.

Keep records of your actual income and expenses each month. This makes it easier to adjust your estimate and gives you the numbers you need when you file your annual return.

Frequently Asked Questions

What if I am an employee but also have a side business?

Your employer withholds taxes from your W-2 wages based on your W-4. Your side business income is separate — you owe self-employment tax on that profit, plus federal and state income tax. You may need to make quarterly estimated payments on the side income, or you can adjust your W-4 to have your employer withhold extra from your paycheck to cover the side business taxes.

Can I change my estimate if I realize I set aside too much?

Yes. If you overpaid through quarterly estimates, you will receive a refund when you file your annual tax return. You can also adjust your remaining quarterly payments downward if you realize your income will be lower than expected. Keep documentation of your actual income and expenses so you can justify the adjustment.

What happens if I do not set aside enough?

You will owe the difference when you file your tax return in April. If you underpaid significantly, you may also owe a penalty and interest. The penalty is usually small if you made a reasonable effort to estimate and pay throughout the year, but it adds up if you owe a large amount.

Do I need to set aside taxes if my business had a loss?

No. If your business expenses exceeded your income, you have a loss and do not owe self-employment tax on that loss. You may still owe federal income tax if you have other income, but the business loss can offset that. Consult a tax preparer if you are unsure how a loss affects your overall tax picture.

Is there a tool to help me calculate my estimate?

The IRS provides Form 1040-ES, which includes a worksheet to calculate quarterly estimated payments. Many tax software programs also have built-in calculators. If your situation is complex — multiple income sources, significant deductions, or state taxes — a tax preparer or accountant can give you a more precise estimate tailored to your circumstances.