Tax Planning When You Work for Yourself
When you work for yourself, a busy month can mean more income and a larger tax bill. Planning during the year helps you decide how much cash to keep available, which expenses belong in the business, and what you can afford to put toward retirement.
This guide focuses on freelancers and sole proprietors who report their business on Schedule C. Partnerships and corporations have additional rules.
Know what the business actually earned
Your profit generally starts with business income minus deductible business expenses. Moving money from the business account to your personal account does not create a business deduction. Leaving the money in the business account does not, by itself, defer tax.
Profit can be subject to both income tax and self-employment tax, which funds Social Security and Medicare. Self-employment tax generally applies when net earnings from self-employment reach $400. Your other income, deductions, and filing status affect the overall bill.
A statutory employee is a different case. If that box is checked on your W-2, the related income and expenses go on Schedule C, but the net amount is not subject to self-employment tax.
Pay during the year
Estimated payments cover income and self-employment taxes that withholding does not cover. They are generally required when you expect to owe at least $1,000 after withholding and credits and those amounts fall short of the applicable payment target.
That target is generally the smaller of 90% of this year's tax or 100% of last year's tax. Use 110% of last year's tax if your prior-year adjusted gross income exceeded $150,000, or $75,000 if married filing separately. The prior-year return must cover 12 months.
For calendar-year taxpayers, the regular federal payment dates are:
| 2026 installment | Payment due |
|---|---|
| First | April 15, 2026 |
| Second | June 15, 2026 |
| Third | September 15, 2026 |
| Fourth | January 15, 2027 |
Payments need to be timely throughout the year. For uneven income, the annualized income method can adjust required installments to when income was earned. IRS Publication 505 explains both methods. State and local payments are separate.
Claim deductions that fit the business
A business expense generally must be ordinary and necessary, meaning common in your work and helpful to the business. Personal spending does not become deductible because it went through a business account. For a mixed-use phone or vehicle, claim only the business portion.
Qualifying meals with a business associate are generally 50% deductible when you or an employee attend, the cost is not lavish, and the other business-meal requirements are met. Entertainment generally is not deductible. Vehicle deductions depend on business mileage and the method you are eligible to use. A home office deduction generally requires regular, exclusive business use and satisfaction of the other qualifying rules.
For equipment, the deduction depends on the applicable depreciation or expensing rules. The equipment must be ready and available for its intended business use. Ordering it in December does not establish that it was placed in service that year.
If you use cash accounting, an unpaid customer invoice that was never included in income does not create a bad-debt deduction. Buying unnecessary supplies also leaves you with less cash, even if a deduction is available.
Choose retirement savings around cash flow
A SEP IRA or solo 401(k) may work for an owner without employees; hiring employees changes the comparison. Eligibility, contribution calculations, administration, and deadlines differ. IRS Publication 560 explains the options.
Deductible contributions can reduce current income tax. Roth contributions provide no current deduction, but qualified withdrawals are tax-free. Choose an amount the business can support after its operating needs and tax payments.
Eligible small employers may qualify for a retirement-plan startup credit of up to $5,000 annually for three years. The amount and eligibility depend on several conditions, including a qualifying employee who is not highly compensated. An owner-only plan does not qualify.
If a family member works in the business
Wages can be deductible when the work is real and the pay is reasonable. Hiring a relative still involves payroll and employment rules.
For a parent's sole proprietorship, a child's wages before age 18 are generally exempt from Social Security and Medicare taxes; the federal unemployment tax exemption lasts until age 21. Federal income-tax withholding rules still apply. These exemptions also apply to a partnership where every partner is a parent, but not to a corporation. The IRS family-employment rules explain the distinctions.
Review health coverage and other deductions
The self-employed health insurance deduction can reduce income tax for qualifying coverage established under your business, subject to an earnings limit. Eligibility for subsidized employer coverage can disqualify a month, including coverage available through your spouse's employer. Marketplace premium credits also affect the calculation. This deduction does not reduce self-employment tax.
If you qualify to contribute to a health savings account, eligible contributions can be deductible, and withdrawals for qualified medical expenses can be tax-free.
You may also qualify for the qualified business income deduction, generally up to 20% of qualifying business income, subject to limitations. Retirement contributions and health insurance deductions can affect that calculation.
Revisit the numbers when revenue, expenses, or household income change. A current profit estimate makes it easier to choose payment and savings amounts that fit the business.