Key points
- The IRS considers you self-employed if you carry on a trade or business as a sole proprietor or independent contractor, or are otherwise in business for yourself (including gig work).
- Independent-contractor income is typically reported to you on Form 1099-NEC; employees instead get a Form W-2 with taxes already withheld.
- Self-employment (SE) tax is 15.3% — 12.4% for Social Security plus 2.9% for Medicare — on your net self-employment earnings (subject to limits below).
- You must file an income tax return if your net earnings from self-employment were $400 or more.
- You generally must pay quarterly estimated taxes if you expect to owe $1,000 or more for the year, using Form 1040-ES.
- Key forms: Schedule C (business profit/loss), Schedule SE (self-employment tax), and Form 1040-ES (estimated payments).
1099 vs W-2: which one are you?
An employee receives a Form W-2 and has income tax, Social Security and Medicare withheld from each paycheck by their employer. A freelancer or independent contractor is paid without withholding, and a business that pays an independent contractor reports it on Form 1099-NEC (Nonemployee Compensation).
Whether you are truly an independent contractor versus an employee is decided by the actual working relationship, not just a label. The IRS looks at common-law factors grouped as behavioral control, financial control and the type of relationship, and stresses there is "no 'magic' or set number of factors" — you weigh the whole relationship.
Practically: as an independent contractor you are self-employed, so the tax responsibilities below fall on you rather than an employer.
- W-2 = employee, taxes withheld by employer.
- 1099-NEC = independent contractor / freelancer, no withholding — you handle the tax yourself.
- A client must generally issue a 1099-NEC when they pay you $600 or more in a year for your services (note: the IRS has stated this reporting threshold rises to $2,000 for payments made after December 31, 2025).
- You owe tax on your freelance income even if no 1099 is issued.
Self-employment tax (Social Security + Medicare)
Because no employer pays the employer share of Social Security and Medicare for you, you cover both halves yourself through self-employment tax. The IRS states: "The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance)."
Only a limited amount of earnings is subject to the Social Security portion each year. The IRS gives this as the annual Social Security wage base — for 2024, the first $168,600 of combined wages and net earnings was subject to the Social Security part (this figure is set annually and changes each year, so check the current one). The 2.9% Medicare portion has no such cap.
Two things soften the blow: you can deduct the employer-equivalent portion of your SE tax when figuring your adjusted gross income, and SE tax is calculated on net earnings (after business expenses), not gross revenue. A higher-earning freelancer may also owe an Additional Medicare Tax of 0.9% on income above a threshold ($200,000 for single filers, $250,000 for married filing jointly).
Quarterly estimated taxes
The US tax system is pay-as-you-go. Employees meet this through paycheck withholding; freelancers meet it by paying estimated taxes during the year. The IRS states that individuals "generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed."
The year is divided into four payment periods, and you use Form 1040-ES to figure and pay each instalment. Missing or underpaying estimates can trigger an underpayment penalty, so many freelancers set aside a percentage of every payment they receive.
Schedule C: reporting your profit
You report freelance income and expenses on Schedule C (Profit or Loss from Business), which attaches to your Form 1040. Your net profit from Schedule C flows into Schedule SE to compute self-employment tax, and into your 1040 for income tax.
Keeping good records of business expenses matters: legitimate expenses reduce your net profit, which reduces both your income tax and your self-employment tax.
Step by step
- Confirm you are self-employed (independent contractor / sole proprietor) rather than an employee — the working relationship decides it, per IRS common-law factors.
- Set aside a portion of every client payment for taxes, since nothing is withheld for you.
- Track all business income and expenses throughout the year.
- Pay quarterly estimated taxes with Form 1040-ES if you expect to owe $1,000 or more.
- At year end, file Schedule C (profit/loss) and Schedule SE (self-employment tax) with your Form 1040.
- If your tax situation is at all complex, work with a licensed CPA or tax professional.
Good to know
- Dollar thresholds and the Social Security wage base change over time — always confirm the current year's figures on IRS.gov before relying on them.
- Tax rules vary at the state and local level too (state income tax, local business taxes); this guide covers federal basics only.
- This is general information, not tax advice. For your specific situation — deductions, an S-corp election, multi-state work — consult a licensed tax professional.
Find clients on Workwave AI.
Once you're set up, create a free profile and get matched with projects — AI, development, data, design and more, with 0% commission.