First-year self-employed taxes: what to set aside, when to pay and what to register

Are you self-employed for tax purposes?

If you are paid to do work for clients and nobody employs you, the IRS treats you as a sole proprietor by default. You report the income and expenses on Schedule C, and you figure self-employment tax on Schedule SE if your net earnings from self-employment are $400 or more. You do not need to file anything to become a sole proprietor. Doing the work is enough.

The forms you receive matter less than people think. For payments made in 2026, a business client only has to send you a Form 1099-NEC once it has paid you $2,000 or more in the year, up from $600 for earlier years. Payment apps and marketplaces only have to send a Form 1099-K once your payments pass $20,000 and 200 transactions. Below those lines you may get no form at all, and the income is still taxable. The IRS is explicit that a payment can be taxable whether or not it appears on a 1099-K.

So do not wait for paperwork to tell you what you earned. Your own invoices and bank records are the source of truth, and they are what you will need if you are ever asked to prove the income, whether by the IRS or by a background check when you next apply for a job.

How much to set aside from every payment

Two taxes apply to freelance profit, and they work differently.

Self-employment tax is Social Security and Medicare for people without an employer. The rate is 15.3 percent: 12.4 percent for Social Security and 2.9 percent for Medicare. It is charged on 92.35 percent of your net profit, so the effective rate is about 14.1 percent of profit. The Social Security part stops at the 2026 wage base of $184,500, counting wages and self-employment earnings together. Self-employment tax is owed even if your income is too low to owe any income tax.

Income tax depends on your total income from all sources. Two deductions help the self-employed. You deduct the employer-equivalent half of your self-employment tax when working out adjusted gross income. And many sole proprietors qualify for the qualified business income deduction, which can be up to 20 percent of business income, subject to income limits. The standard deduction for a single filer in 2026 is $16,100.

A worked example. Say your net profit for 2026, after expenses, is $20,000.

1. Self-employment tax base: $20,000 x 92.35% = $18,470.
2. Self-employment tax: $18,470 x 15.3% = $2,825.91.
3. Half of that, $1,412.96, comes off your income before income tax.

If the freelancing was your only income, the standard deduction would cover most of the rest and the income tax would be small. If you also had a salary, the profit is taxed at your top bracket. That is why a flat rule of thumb fails people: someone with a full-time job freelancing on the side owes far more on the same $20,000 than someone with no other income.

To get your own number, enter your profit, wages and state into the RichTactic side hustle tax calculator, then move that percentage into a separate savings account the day each payment lands. Price your work with the tax already in it; the freelance hourly rate calculator does that for you.

Quarterly estimated payments in your first year

Nobody withholds tax from freelance income, so the IRS expects you to pay as you go. Individuals generally have to make estimated payments if they expect to owe $1,000 or more when they file. For the 2026 tax year the due dates are:

• April 15, 2026 for income from January through March
• June 15, 2026 for April and May
• September 15, 2026 for June through August
• January 15, 2027 for September through December

When a date falls on a weekend or holiday, the next business day counts. You can pay online through your IRS account or Direct Pay, and you can pay more often than quarterly if that is easier.

Year one has a useful safe harbor. You generally avoid the underpayment penalty if you pay at least 90 percent of this year's tax or 100 percent of the tax shown on last year's return, whichever is smaller. Higher earners have stricter rules, set out in Publication 505. If you had a salaried job last year, your prior-year tax is a known number, and covering it through withholding and estimated payments protects you even if the freelancing takes off. You still owe the balance when you file.

There is also an exemption. You do not have to pay estimated tax this year if you had no tax liability last year, were a US citizen or resident for the whole year, and last year covered 12 months. A student or someone out of work all of last year may fit.

If your income arrives unevenly, such as nothing for months and then a big contract in the fall, the annualized income method on Form 2210 can lower or remove the penalty by matching payments to when you actually earned.

Registration: what you need and what you can skip

Federal. A sole proprietor with no employees can use their Social Security number. An employer identification number is optional in that case, but it is free from the IRS online in a few minutes, and having one lets you give clients an EIN on Form W-9 instead of your SSN. The IRS warns that you never have to pay a fee for an EIN; sites that charge are third parties. You need an EIN if you hire employees or form a partnership or corporation.

State and local. This is where the real variation is. Depending on where you live you may need a city or county business licence, a trade name registration (often called a DBA) if you work under a name other than your own, and a sales tax permit if you sell taxable goods or services. Check your state's business portal and your city's licensing office before you take your first job, because some licences must be in place before you work.

An LLC is optional. Forming one is a state filing with a fee, and a single-member LLC is taxed exactly like a sole proprietor by default, so it changes nothing on your federal return in year one. People form one for liability separation and to look established to clients. If you do, form it with the state first and apply for the EIN afterwards, as the IRS advises.

A DBA or business licence has a second use. When you go back to applying for jobs, background check firms often ask self-employed candidates for proof such as a 1099, a DBA or a business licence. With the 1099-NEC threshold now at $2,000, small clients may never send you one, so a registration document can be the easiest proof you have. How to put self-employment on a resume covers the rest of that process.

Invoices and records that make tax time easy

An invoice does not need special software. Each one should show:

• Your name or business name, address and email
• The client's name and address
• An invoice number that never repeats, and the date
• What you did, in enough detail that you would recognise it in two years
• The amount, the payment terms (for example, due within 14 days) and how to pay you

Business clients may send you a Form W-9 to fill in before they pay. That is normal; it is how they collect your taxpayer number for their own reporting.

Open a separate bank account for the business, even if it is a second free personal account. Every client payment goes in and every business expense comes out, and your bookkeeping becomes a bank statement.

Keep records of income and expenses for at least three years from the date you file the return, which is the IRS's general rule; some situations need longer. The expenses most first-year freelancers miss are:

• Mileage to client sites. The IRS business rate for 2026 is 72.5 cents a mile from January 1 to June 30 and 76 cents from July 1 to December 31. Log the date, destination, purpose and miles for each trip.
• A home office used regularly and exclusively for the business. The simplified method allows $5 per square foot, up to 300 square feet, which caps it at $1,500.
• Software, certification renewals, tools, a share of your phone bill, and platform fees. Upwork and Fiverr fees are business expenses too.

The mistakes that cause a painful first April

• Spending the tax money. The money was earned, it was taxable, and by April it is gone. A separate savings account and an automatic transfer on payday prevent it.
• Waiting for a 1099. Under the new thresholds many small clients will never send one. Report from your own records.
• Skipping expenses. Every legitimate expense you fail to record costs you self-employment tax and income tax on money you never kept.
• Forgetting state tax. If your state has an income tax, check its estimated payment rules too; they run on the state's own schedule.
• Claiming unemployment benefit without reporting the work. If you were laid off and are still claiming, report freelance earnings to your state agency as it requires.

If you are reading this after the fact and already owe more than you can pay, the IRS offers payment plans, and RichTactic's guide to paying off tax debt walks through the options. File on time even if you cannot pay in full. The IRS failure-to-file penalty is 5 percent of the unpaid tax for each month the return is late, up to 25 percent, while the failure-to-pay penalty is 0.5 percent a month. Filing and setting up a payment plan is the cheaper path.

UK note: your first year as a sole trader

The UK system has different names and dates, but the same principle: nobody takes tax out, so you set it aside yourself.

• The trading allowance lets you earn up to £1,000 of gross trading income a tax year without telling HMRC. Above that, you register for Self Assessment.
• Register by 5 October after the end of the tax year in which you started. For income in the year that ended on 5 April 2026, the deadline was 5 October 2026.
• File online and pay by 31 January. For the 2025 to 2026 tax year that is 31 January 2027.
• Expect a bigger first bill. If your tax bill is £1,000 or more, HMRC also asks for payments on account, each half of last year's bill, due on 31 January and 31 July. In your first year that means paying the full bill plus the first payment on account towards next year, all on the same January date.
• National Insurance for 2026 to 2027 is Class 4 at 6 percent on profits between £12,570 and £50,270 and 2 percent above that. Class 2 is treated as paid if profits are £7,105 or more, so you no longer pay it, but it still protects your record.
• Making Tax Digital for Income Tax now applies to sole traders with qualifying income over £50,000, and will extend to those over £30,000 from 6 April 2027 and over £20,000 from 6 April 2028. It means keeping digital records and sending quarterly updates through approved software.

RichTactic's side hustle tax guide compares the US, UK, Canadian and Australian thresholds side by side if you work across borders.