Pay & TaxesFreelance & Contract

Freelance and contract work changes your taxes. Here's exactly how.

The tax your W-2 never showed you

W-2 employees split FICA with their employer. As a freelancer, you pay both halves.

Self-employment tax is 15.3% of your net earnings — 12.4% for Social Security and 2.9% for Medicare. As an employee, you paid half of this (7.65%) and your employer paid the other half invisibly. As a freelancer, you pay all of it. You can deduct half of the SE tax on your federal return, but the rate itself is fixed.

The 25–30% rule: set it aside immediately

Every time a client pays you, move 25–30% to a dedicated tax savings account before touching the rest. Don't wait. Don't borrow from it. This is not your money. It belongs to the IRS.

Set-aside rates by income

Under $30k~20%

Self-employment tax (15.3%) is your biggest liability here. Add a small buffer for federal income tax depending on your deductions and filing status.

$30k–$60k~25%

You're in the 22% federal bracket for most of this range. After SE tax and the SE deduction (you can deduct half of SE tax), budget for combined federal + state liability.

$60k–$100k~28–30%

Federal tax starts climbing meaningfully here. The 22–24% bracket applies to income above roughly $44k (single) or $89k (married). SE tax remains constant.

Over $100k~32–35%

Combined federal, state, and SE tax liabilities get complex here. Deductions and retirement contributions have outsized impact on your bill. A CPA is worth the cost at this level.

Quarterly estimated taxes

Federal estimated taxes are due four times a year — roughly April 15, June 15, September 15, and January 15 of the following year. When a date falls on a weekend or holiday, it shifts to the next business day. Confirm the current year's dates on the IRS site (irs.gov/payments) before scheduling payments.

If you expect to owe more than $1,000 in federal taxes for the year, you're required to make quarterly estimated payments or face an underpayment penalty.

The three-account system

Irregular income needs structure. Three separate accounts keep taxes, spending, and savings from bleeding into each other.

Checking

Day-to-day spending (floor budget only)

Tax reserve

25–30% of every payment. Don't touch.

Buffer savings

Surplus above floor, builds to 3 months

Know your income floor

Look at the past 6–12 months. What's the lowest you made in a single month? That's your floor. Budget every month as if that's all you'll make, regardless of what arrives.

Cover baseline costs, nothing else

Your floor income covers rent, utilities, insurance, minimum debt payments, and groceries. That's it. Flexible spending only happens when income exceeds the floor and the buffer is full.

Set aside 25–30% for taxes. Do it immediately.

Every time a client pays you, move 25–30% to a dedicated tax savings account before touching the rest. Don't wait. Don't borrow from it. This is not your money. It belongs to the IRS.

Everything above the floor builds the buffer first

After taxes, anything above your floor goes to a separate buffer account (aim for 2–3 months of baseline expenses). Once the buffer is full, you can spend the surplus however you want. Guilt-free.

Baseline vs. flexible expenses

Fixed baseline costs

Rent or mortgage
Utilities (electric, gas, water)
Health insurance premium
Minimum debt payments
Phone and internet
Subscriptions you'd cancel last
Groceries (basics)

Add these up. That number is your monthly floor. If your lowest income month doesn't cover this, you have a baseline problem. The first priority is reducing fixed costs or increasing your floor income.

Flexible costs

Dining out and takeout
Entertainment
Clothing and personal care
Travel and vacations
Gifts and subscriptions
Upgrades and gear

None of this gets a budget line. These come from whatever's left after baseline + tax set-aside + buffer. A good month = more flexibility. A slow month = zero flexible spending. That's the whole system.