Your first year of self-employment taxes

The first year working for yourself, taxes go from something that happens to you to something you have to do. Nobody withholds anything, two taxes apply instead of one, and the IRS expects money four times a year from someone who has never sent them a payment in their life. Here is the whole picture, in the order you will meet it.

You now pay two taxes

Your profit (income minus business expenses) owes regular income tax at the same brackets as everyone else, plus about 15.3% self-employment tax, which is Social Security and Medicare with you covering both the employee and employer halves. Together they commonly take 25% to 35% of profit, which is why the standard advice is to move that share of every payment you receive into a separate account the day it arrives. The 1099 tax calculator gives you your own percentage instead of the rule of thumb, and the set-aside guide explains where the rule of thumb breaks.

The quarterly calendar

If you expect to owe $1,000 or more at filing time, the IRS wants four payments during the year, due in mid-April, mid-June, mid-September, and mid-January. Notice the spacing. They are not even quarters, and the June one surprises everybody. Missing an installment starts the underpayment penalty running like interest on that installment.

The first-year advantage almost nobody uses

The safe harbor rule protects you from any penalty once your payments reach 100% of last year's total tax (110% if last year's AGI topped $150,000). In your first self-employed year, last year was a W-2 year, and its total tax was probably modest and largely covered by withholding you can match with small payments.

That makes year one the easiest year you will ever have to be penalty-proof. Pay last year's amount in four installments, keep your real set-aside for the April bill, and no penalty applies even if the business grows quickly. One more first-year rule works in your favor. If last year's total tax was zero, you owe no estimated payments at all this year, penalty-free, no matter what you earn.

Actually sending a payment

There is no enrollment. Pay online at IRS Direct Pay (choose Estimated Tax, Form 1040-ES) from a bank account, or mail a 1040-ES voucher with a check to the IRS box for your state. Keep a record of each payment. Your state likely wants its own quarterly payments through its own portal, on thresholds that are often lower than the federal one.

Sources: IRS Publication 505 · IRS Form 1040-ES