Self-Employed Tax Guide 2026: 12 Rules to Maximize Your Deductions

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Congratulations, you've decided to launch a new business or a side hustle. You're in good company.

According to the Bureau of Labor Statistics, nearly 16.9 million Americans are self-employed as of mid-2025, representing approximately 10% of the U.S. workforce.

Whether owners, freelancers, or sole proprietors, the self-employed span every field — from skilled tradespeople and creatives to real estate agents and consultants in every niche.

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But being self-employed carries financial risks, especially with the federal self-employment tax. This 15.3% tax is your responsibility.

To meet your obligation, you must carefully plan and set money aside for payment.

Unlike a traditional job where your employer pays half of your Social Security and Medicare taxes, you are responsible for the entire amount.
For many small business owners, this tax liability is generally reported on their individual return (Form 1040 with Schedule C), not a separate business return.

There is much to manage, so we’ve compiled a list of 12 tips to help you navigate your tax responsibilities. Let's start with establishing your business identity.

1. Help protect your identity with an EIN

An Employer Identification Number (EIN) is a unique nine-digit number the IRS assigns to identify your business for tax purposes.

Do you need one?

If you're a sole proprietor or single-member limited liability company (LLC), you generally don't need an EIN. The IRS treats these entities as a single entity with the owner and requires you to use your Social Security number for tax filings.

Multi-member LLCs, however, must obtain an EIN because they're treated as partnerships or corporations.

When you must get an EIN:

You hire employees (even part-time or seasonal)
You set up a retirement plan like a SEP-IRA or solo 401(k)
You withhold taxes on payments to a nonresident alien

Why you might want to get one anyway:

Banks typically require an EIN to open a business account
Vendors and clients expect it and it looks professional
It protects your identity by keeping your Social Security number private

You can apply for an EIN online for free at IRS.gov.

2. Separate your business and personal bank accounts

It's good practice to keep your personal and business accounts separate. If you use one account, you’re forced to reconstruct the entire year at tax time, separating your personal and business expenses manually.

Mixing your finances makes bookkeeping more difficult, as you have to keep track of both personal and business expenses.

Then there’s the audit risk. If you’re audited by the IRS, the lack of clarity in your business records means it’s much harder to prove a deductible expense to the IRS if your personal and business expenditures are mixed.

Bottom line: having separate personal and business accounts makes your business life easier.

3. Understand how self-employment tax differs from regular income tax

It’s important to understand that self-employment and income taxes are not the same. The self-employment tax is 15.3% in 2026, and covers Social Security and Medicare taxes. The levy is due in addition to the personal income tax.

Also, the self-employment tax isn't calculated on your business's income but on its net earnings (or net income). Net earnings are your gross revenue minus all your business expenses.

The tax is calculated on 92.35% of this amount.

4. Lower your tax bill through business expense deductions

The importance of keeping meticulous business records to substantiate expenses cannot be overstated. Not only will this lower your self-employment tax liability, but it’ll lower your income tax liability, too. More than that, you need these records to support any expenses you’ve claimed should the IRS audit you.

What’s a legitimate business expense? It varies greatly depending on your business type.

Generally, what you purchase for use in your business activities, whether products or services, is a business expense and deductible on your return. They're the ordinary and necessary things you need to run a business:

Office supplies
Computers and printers
Postage
Copy services

Home Office Deduction

There's a deduction you can take if your business is located in your home.

The home office deduction can be calculated using either the simplified or the actual expense method. To qualify for the deduction, the space must be used regularly and exclusively for your business operations:

"Regularly" means a space that you routinely use for business. Incidental and occasional use doesn't count
"Exclusively" means a space that you only use for business

If you use your home office for only part of the year, your deduction is limited to the period when you regularly and exclusively use the space.

Calculating the deduction using the simplified method, multiply the square footage of your office space (up to 300 square feet) by $5. The maximum deduction permitted in 2025 (and 2026) is $1,500.

The actual expense method is more involved. It can include the appropriately divided parts of your:

Mortgage interest
Rent
Utilities
Insurance
Repairs
Depreciation

5. If you're eligible, claim up to $25,000 in tip tax relief

If you're self-employed in a traditionally tipped occupation, like as a freelance hairstylist, rideshare driver, food delivery worker, or personal service provider, you may be eligible for a significant new tax break.

The 2025 Trump tax bill, often also called the "big beautiful bill," allows eligible self-employed workers to deduct up to $25,000 in qualified tips from their taxable income for tax years 2025 through 2028.

This deduction is available whether you take the standard deduction or itemize.

To qualify, you must:

Work in an occupation that customarily and regularly received tips before December 31, 2024
Have a valid Social Security number (not an ITIN)
Have net self-employment income for the year
Not work in a Specified Service Trade or Business (SSTB) under Section 199A, which excludes fields like law, accounting, health, consulting, and financial services

The deduction begins to phase out for single filers with modified adjusted gross income (MAGI) above $150,000 and for married couples filing jointly with modified adjusted gross income above $300,000.

If eligible, you'll claim this deduction on Schedule 1-A, which flows to line 13b of your Form 1040.

6. Claim up to 20% of qualified business income with the QBI deduction

Qualified business income, or QBI, is the net income from your qualified trade or business, after deductions for ordinary business expenses. A "qualified" trade or business is:

A sole proprietorship
A partnership
An S corporation
Some trusts and estates

The QBI deduction, also known as the Section 199A deduction, allows the self-employed to deduct up to 20% of their qualified business income, and is available whether they take the standard deduction or itemize.

Example: Let's say your business profit is $80,000 for the 2025 tax year. To find your actual QBI, the IRS generally has you subtract the deductible part of your self-employment tax, health insurance premiums, and retirement contributions.

If those items total $10,000, your QBI is $70,000. At 20%, your deduction would be $14,000, subject to income-based phase-out limits.

Note: This is a "below-the-line" deduction, meaning it reduces your taxable income (not your adjusted gross income) whether you take the standard deduction or itemize.

7. Deduct 100% of your health insurance premiums

This is one of the most valuable deductions for the self-employed. You can usually deduct 100% of your health insurance premiums, without having to itemize your deductions. This applies to:

Medical Insurance
Dental Insurance
Long-term care insurance
Coverage for your spouse and dependents

To qualify, you must:

Have net self-employment income
Not be eligible for employer-sponsored coverage (including through a spouse).

8. Manage quarterly estimated tax payments

Yes. For the self-employed, tax time comes not once a year, but four. The IRS has a pay-as-you-go system for self-employment taxes, and they’re due every quarter.

As for the rule, if you think you’ll owe at least $1,000 in federal taxes for the tax year — self-employment or income — you’ll have to make quarterly estimated tax payments. Due dates are

April 15
June 15
September 15
January 15 of the following year

Do your best not to miss any payments, as this can result in underpayment penalties and interest. For more information, see our report: When Are Estimated Tax Payments Due?

9. Know why self-employment tax is high

Don’t be shocked by what you see after calculating your self-employment tax.

For wage earners, the Social Security and Medicare taxes are split evenly between the employer and the employee. That’s not true for the self-employed. You’re responsible for the tax in full.

However, you do get a break — you can deduct half of the tax due from your income taxes.

10. Set aside self-employment and income tax money

Always remember to set aside money for both the self-employment tax and the income tax to avoid cash shortfalls at tax time.

A generally accepted rule of thumb is to reserve at least 25%-30% of your gross earnings to cover the self-employment tax, the income tax, and state and local taxes.
Consider setting aside an even larger percentage if your business is profitable.

Tax Tip

To help you save, it’s worth opening a business savings and/or checking account just for taxes. Start by setting up automatic transfers to move a percentage of every payment you receive into your business account. You’ll create a disciplined saving habit and build a financial cushion.

11. Consider reinvesting in your business to lower your tax bill

Your self-employment tax is based on net profit, not what you personally withdraw or keep in the business. It doesn't matter whether you leave money in your business account, withdraw it to your personal account, or reinvest it — all those funds came from your business's net profit.

However, reinvesting profits can reduce your self-employment tax if the expenditure is a legitimate, deductible business expense. For example, buying equipment and office supplies, or hiring contractors, reduces your net profit and lowers your self-employment tax.

Simply leaving money in the business account or saving for future expenses does not reduce your business's net profit or your tax liability.

12. Navigate 1099-K and 1099-NEC reporting requirements

Being self-employed means 1099-K and 1099-NEC are two of the most important 1099 reporting forms you'll deal with, and they work very differently.

Form 1099-NEC reports nonemployee compensation, that is, what clients pay you for work.

Starting in 2026, reports payments of at least $2,000 (will be indexed for inflation each subsequent year)
It reports the services you performed, not goods

Form 1099-K reports payment processing transactions from 3rd-party payment networks, like Venmo, PayPal, eBay, etc. It does not come from your clients.

A 1099-K reports all gross payments processed on your behalf through payment platforms
It includes all payments processed, even if some were refunds or fees taken out
Under the 2025 Trump tax bill, a 3rd-party payment platform will send you a 1099-K form only if your gross sales exceed $20,000 AND the number of transactions exceeds 200. (Both conditions must be met.)

It is worth repeating that a 1099-K reports only gross receipts, that is, before fees, refunds, and chargebacks. This means the 1099-K you receive can sometimes overstate your income. You will have to reconcile it with your actual business income as shown in your books and records.

Note: Keep in mind that the 1099-K and 1099-NEC are information returns that third-party processors and clients must file with the IRS. Even if you do not receive these forms from a processor or a client, you are still required to report the income. This is especially important for 1099-K if you are not a high-volume seller.

Working for yourself: Bottom line

As mentioned, there’s a lot to know about being self-employed and more to learn. If you're new to the game, it’s tempting to turn to family, friends, and social media for free financial advice. But tax is complicated, so you might need expert guidance.

If you have the funds, reserve an hour with a CPA and ask targeted questions. If you don’t, or think you need more than an hour, small business development centers (SBDCs) can help.

SBDCs offer no-cost and low-cost coaching and training for the self-employed on how to run a business.

The U.S. Small Business Administration also offers classes, and states sponsor their own SBDCs.

Roxanne Bland, a self-styled “tax nerd,” has worked in the tax field for over 30 years as a state tax legal analyst. Before joining Kiplinger as a tax writer to help ordinary people make sense of their federal and state tax obligations, Roxanne spent many years covering developments in state tax jurisprudence at the U.S. Supreme Court and worked closely with state revenue agencies to develop uniform tax legislation. She has also contributed to Tax Notes State, a Tax Analysts publication focusing on cutting-edge corporate tax issues.