Two federal taxes, not one
An employee sees one tax line on a pay slip and never thinks about the rest. Their employer withholds income tax, withholds half of Social Security and Medicare, and quietly pays the other half itself.
When you are paid on a 1099, none of that happens. The client sends the full amount, and you owe two separate federal taxes on your profit:
- Self-employment tax — Social Security and Medicare, both halves of it, because you are now the employer as well as the employee.
- Federal income tax — the same progressive brackets an employee pays, applied to your taxable income.
Then there is state income tax on top, which depends entirely on where you live. The mistake that causes most first-year shocks is reserving for income tax alone. The self-employment tax is not small, and it starts from the first dollar of profit rather than after an allowance.
Self-employment tax, step by step
Self-employment tax is 15.3%: 12.4% for Social Security and 2.9% for Medicare. You owe it if your net earnings from self-employment are $400 or more for the year.
It is not charged on your whole profit. You first multiply your net profit (Schedule C, line 31, for a sole proprietor) by 92.35%. That step stands in for the employer’s half being deductible, and it means the effective rate on profit is a little under 15.3%.
Net earnings = net profit × 92.35%
SE tax = net earnings × 12.4% (up to the wage base) + net earnings × 2.9%
Two limits matter:
- The Social Security wage base. The 12.4% part only applies to the first $184,500 of combined wages and net self-employment earnings in 2026 (it was $176,100 in 2025). If you also have a salary, the salary uses up that ceiling first. The 2.9% Medicare part has no ceiling.
- Additional Medicare Tax. A further 0.9% applies once combined wages and self-employment income pass $200,000 for a single filer ($250,000 married filing jointly, $125,000 married filing separately).
Finally, you can deduct half of your self-employment tax when working out your adjusted gross income. It does not reduce the self-employment tax itself — only the income that the income tax brackets are applied to.
Federal income tax for 2026
The One, Big, Beautiful Bill was signed into law on 4 July 2025, and the IRS’s 2026 inflation adjustments include its amendments. For the 2026 tax year the standard deduction is $16,100 for a single filer, $32,200 married filing jointly and $24,150 for head of household.
The 2026 brackets for a single filer, applied to taxable income:
| Rate | Single: taxable income over | Married filing jointly: over |
|---|---|---|
| 10% | $0 | $0 |
| 12% | $12,400 | $24,800 |
| 22% | $50,400 | $100,800 |
| 24% | $105,700 | $211,400 |
| 32% | $201,775 | $403,550 |
| 35% | $256,225 | $512,450 |
| 37% | $640,600 | $768,700 |
One more deduction matters to most sole proprietors: the qualified business income (QBI) deduction. If you are eligible, it lets you deduct up to 20% of your qualified business income, capped at 20% of taxable income (less net capital gain). QBI is reduced by the deductible half of self-employment tax, and by self-employed health insurance and retirement contributions. The 2026 Form 1040-ES notes that recent legislation made the deduction permanent. It is limited for higher incomes and for some service businesses, so check the Form 8995 instructions before relying on it.
Note what the QBI deduction does not touch: self-employment tax. That is still worked out on the full 92.35% of profit.
Worked example: $90,000 of profit
A single freelance designer, 2026, no other income
Net profit after business expenses: $90,000. Standard deduction, no wages, eligible for the full QBI deduction. Figures rounded to the dollar.
| Step | Amount |
|---|---|
| Net earnings from self-employment ($90,000 × 92.35%) | $83,115 |
| Social Security (12.4%, below the $184,500 base) | $10,306 |
| Medicare (2.9%) | $2,410 |
| Self-employment tax | $12,717 |
| Deduct half of SE tax: $90,000 − $6,358 = AGI | $83,642 |
| Less standard deduction ($16,100) | $67,542 |
| Less QBI deduction: the smaller of 20% × $83,642 QBI ($16,728) and 20% × $67,542 ($13,508) | $13,508 |
| Taxable income | $54,033 |
| Federal income tax ($5,800 + 22% × $3,633) | $6,599 |
| Total federal | $19,316 |
That is 21.5% of profit ($19,316 ÷ $90,000). Two-thirds of it is self-employment tax, not income tax — which is why reserving on the income tax brackets alone falls so far short.
The average rate is not the rate on the next dollar. An extra $1,000 of profit in this example adds about $305 of federal tax: roughly $141 of self-employment tax and $164 of income tax at 22% on what is left after the half-SE and QBI deductions. If a big invoice is still to come this year, reserve on it at nearer 30% than 21.5%.
Spread evenly, the four estimated payments would be about $4,829 each. State tax, if your state has one, comes on top.
Without the QBI deduction — if you are not eligible, or your income is past the limits — taxable income in the same example is $67,542, income tax is $9,571, and the federal total rises to $22,288, or 24.8% of profit.
Paying it in four instalments
The US tax system is pay-as-you-go. With no employer withholding, you are expected to send estimated tax during the year using Form 1040-ES. In most cases you must pay estimated tax for 2026 if you expect to owe at least $1,000 after withholding and refundable credits.
The 2026 due dates, from the 2026 Form 1040-ES:
| Payment | Income period | Due |
|---|---|---|
| 1st | 1 January – 31 March | 15 April 2026 |
| 2nd | 1 April – 31 May | 15 June 2026 |
| 3rd | 1 June – 31 August | 15 September 2026 |
| 4th | 1 September – 31 December | 15 January 2027 |
The periods are not equal quarters — the second covers only two months — which catches people who plan on a neat three-month cycle. You can skip the January 2027 payment if you file your 2026 return by 1 February 2027 and pay the whole balance with it. If a date falls on a weekend or legal holiday, the next business day counts.
The IRS can charge a penalty on each underpayment for the number of days it stays unpaid, so a payment that is short in June is not fully repaired by paying extra in January. If your income is lumpy — a quiet spring and a heavy autumn — the annualized income installment method (Form 2210, Schedule AI) lets your required payments follow when the income actually arrived, rather than four equal amounts.
The safe-harbour rules
You do not have to predict this year’s tax perfectly to avoid a penalty. You are generally covered if your withholding and timely estimated payments are at least the smaller of:
- 90% of the tax on your 2026 return, or
- 100% of the tax on your 2025 return (which must cover all 12 months) — rising to 110% if your 2025 adjusted gross income was more than $150,000 ($75,000 if married filing separately).
The prior-year test is the useful one for irregular income, because the number is already known. If your 2025 total tax was $15,000 and your AGI was under $150,000, four payments of $3,750 on time protect you from the underpayment penalty for 2026, however well the year goes.
The catch is in the word penalty. The safe harbour stops the penalty; it does not reduce the tax. If 2026 turns out to be a $22,000 year, the other $7,000 is still due when you file. The reserve account should hold the real estimate, even if the quarterly payments only send the safe-harbour amount.
There is also an exception for people with no 2025 tax liability who were US citizens or residents for all of 2025. In your first year that can mean no estimated payments are required at all — and the full first-year bill arriving in one go with the return. That is exactly when a reserve earns its keep.
State tax, and what this cannot tell you
Whether you owe state income tax, and how much, depends on your state, which sets its own rates, deductions and estimated-payment rules. Check your state revenue department’s site and add that percentage to the federal figure before you settle on a reserve rate.
The method above also leaves out things that can move the answer a long way:
- Wages from a job. A salary uses up the Social Security wage base and lower brackets first, so self-employment income on top is taxed at your higher marginal rate.
- A spouse’s income. Joint filing changes the brackets, the standard deduction and the Additional Medicare Tax threshold.
- Retirement contributions and health insurance. Both can reduce income tax and QBI; neither is in the example.
- Business structure. An S corporation or LLC taxed as one works on a different basis entirely.
- Credits and newer deductions. Anything else on your return changes the income tax line.
The practical routine is the one in reserving tax on irregular income: work out your effective rate once, move that share of each payment’s profit the day it lands, and send the quarterly amount from the reserve rather than from whatever is left. CashDesk supports the US system — federal income tax, self-employment tax, the QBI deduction and 1040-ES quarterly payments — and keeps the reserve and the next instalment date current as you import statements. It prepares the figures; it never files anything for you.