Margin notes
- The self-employment tax rate is 12.4% for Social Security plus 2.9% for Medicare, and you can deduct one-half of it when figuring AGI, according to IRS Topic 554.
- The simplified home office deduction is $5 per square foot, up to 300 square feet.
- The QBI deduction allows eligible taxpayers to deduct up to 20 percent of qualified business income, subject to limits.
The moment you earn money outside a paycheck, whether from freelancing, gig work or a small online shop, the IRS treats you as a business. That brings an extra tax most people do not expect, and a set of deductions most employees cannot use. Getting both right is the difference between a painful April and a manageable one.
The extra tax: self-employment tax
Employees split Social Security and Medicare taxes with their employer. Self-employed people pay both halves. IRS Topic 554 sets the self-employment tax rate at 12.4% for Social Security and 2.9% for Medicare, applied to net earnings from self-employment. An additional Medicare tax applies above $200,000 of income for single filers, $250,000 for joint filers and $125,000 for married filing separately.
You count as self-employed if you are a sole proprietor or independent contractor, a partner in a partnership, a member of a single-member LLC that is disregarded for tax purposes, or are otherwise in business for yourself, the IRS says. The tax is figured on Schedule SE.
Deduction 1: business expenses
The IRS self-employed tax center explains that you figure your business income by subtracting your business expenses from your business income. The result is your net profit, and it is the net figure that is taxed. Keeping records of costs such as supplies, software, equipment and business mileage is the most direct way to lower the tax on a side business.
Deduction 2: half of self-employment tax
When figuring adjusted gross income, Topic 554 says you can deduct one-half of the self-employment tax. This is an adjustment to income, so you get it whether or not you itemize.
Deduction 3: home office
If you use part of your home for business, you may be able to deduct expenses for that space, whether you own or rent. The IRS sets two basic requirements:
- You must regularly use part of your home exclusively for conducting business.
- Your home must be your principal place of business, or a place where you regularly meet clients or customers. A separate structure such as a studio or garage can qualify if used exclusively and regularly for business.
If the space is merely appropriate and helpful, it does not qualify, the IRS says. You can figure the deduction two ways. The simplified option is $5 per square foot of home used for business, up to a maximum of 300 square feet. The regular method uses actual expenses, such as mortgage interest, insurance, utilities, repairs and depreciation, allocated by the share of the home used for business.
Tip: A 150-square-foot spare room used only as an office gives a simplified deduction of $750. The maximum under the simplified option is $1,500, at 300 square feet. The regular method can give more for larger spaces but requires more records.
Deduction 4: qualified business income (QBI)
The IRS describes the qualified business income deduction as allowing eligible taxpayers to deduct up to 20 percent of their QBI from a domestic business run as a sole proprietorship or through a partnership, S corporation, trust or estate. The deduction is limited to 20 percent of taxable income minus net capital gain, and other limits can apply at higher incomes. The IRS also notes a new minimum deduction for active qualified business income for tax years beginning after 2025.
Deduction 5: health insurance
The IRS says self-employed individuals are allowed a deduction for income tax purposes for the cost of health insurance. If your plan qualifies, a health savings account adds another deduction; see Health Savings Accounts: The 2026 Limits and the Tax Breaks.
Deduction 6: your own retirement plan
Self-employed people can open retirement plans that work like an employer plan. The IRS lists the main options:
| Plan | How it works |
|---|---|
| SEP-IRA | Contribute up to 25% of net earnings from self-employment, within the annual dollar cap; can be set up as late as the tax return due date, including extensions |
| One-participant 401(k) | Sometimes called a solo 401(k); generally the same as other 401(k) plans, for a business with no employees other than a spouse |
| SIMPLE IRA | Up to $17,000 for 2026 in most plans, plus catch-up at 50+, plus an employer contribution |
For 2026, Notice 2025-67 sets the overall annual limit for defined contribution plans at $72,000. The details depend on the plan, so check the plan documents or ask a provider. The general rules for workplace and individual accounts are in Retirement Accounts and Taxes: 401(k), Traditional IRA and Roth IRA in 2026.
Paying during the year: estimated taxes
No employer withholds tax from freelance income. The IRS says individuals, including sole proprietors, generally have to make estimated tax payments if they expect to owe $1,000 or more when they file. The year is divided into four payment periods, each with its own due date, and you may owe a penalty if you underpay or pay late, even if you end up due a refund.
A simple routine
- Keep a separate bank account or card for business income and costs.
- Save a share of every payment for taxes, so estimated payments are ready.
- Track mileage and home office use as you go, not in April.
- Review the four estimated tax dates at the start of the year.
Running income through a business is one of the strategies in How the Wealthy Reduce Taxes Legally, and the Versions You Can Use. Self-employment rules have many details, and a tax professional can confirm what applies to your business.