Nobody Withholds For You: Working Out Your Own Freelance Tax Set-Aside

Every advice column says "set aside 25–30%." That number is someone else's marginal rate, filing status and expense list. It is not derived, and for a specific freelancer it can be wrong in either direction — which is the part that actually costs money.

Here is the arithmetic instead, US federal only, with every input stated so you can swap in your own. This is not tax advice and it is not a substitute for an accountant; it is a method you can check line by line.

Two different things get called "tax"

Self-employment tax and income tax behave differently, and conflating them is why the round percentages exist.

Self-employment tax is 15.3% of 92.35% of net profit (IRS Topic 554 states the 92.35% factor; the self-employment tax page states the rate, split 12.4% Social Security and 2.9% Medicare).

0.9235 × 0.153 = 14.13% of your Schedule C net profit.

That part is fixed arithmetic — until your earnings hit the Social Security limit, after which only the Medicare portion continues. Above certain incomes an extra 0.9% Medicare tax applies ($200,000 single and head of household, $250,000 married filing jointly, $125,000 married filing separately).

One honest caveat: the IRS page I could read still carried the 2024 earnings limit of $168,600 and no 2026 figure. Look up the limit for the year you are actually filing rather than trusting any blog post, including this one.

Also worth knowing: you generally owe Schedule SE once net earnings are $400 or more. If you invoice regularly you are over that bar.

Income tax is a bracket, not a percentage. You do not pay 12% of everything; you pay 10% up to a point and 12% on the slice above it, and the deduction you took for the employer-equivalent half of SE tax lowers the base.

A worked example, inputs first

A freelancer grossing $67,200 a year ($5,600 a month) with $2,400 of software and bookkeeping expenses. Net profit to income tax: $64,800.

Step	Number
Gross	67,200
Business expenses	2,400
Net profit	64,800
SE base (92.35%)	59,842.80
SE tax at 15.3%	9,155.95
Half of SE deductible	4,577.97
Taxable income after standard deduction	6,422.03 under the 12% row
Federal, SE + income tax	14,202.59

14,202.59 / 67,200 = 21.13% of everything that lands.

So the 25% crowd happens to clear this person's real need — and that coincidence is the trap. Run the same chain with $11,000 of real expenses instead of $2,400 and the answer moves. Marry, itemise, take on a spouse's W-2 income, or climb into the 22% band and it moves again.

The reason a single percentage cannot work: roughly 14.13% of profit is arithmetic, and the rest depends on a bracket, a filing status and a deduction.

Average rate fills the jar; marginal rate prices the job

The 21.13% above is an average across the whole year. The rate that matters when a client offers you one more project is the marginal one — what the next dollar of profit costs.

At the 12% row, that is about 25.28% of the next dollar. Above the Social Security limit only the Medicare part applies, and it drops. So "is the extra work worth it" has a real answer, and it is not your average rate.

This also changes how you quote. If you price a project using your average rate when the marginal rate is what the next dollar actually costs, you underprice the specific job that would have been worth declining.

The penalty question needs no forecast

Estimated tax is quarterly and you have to initiate it. The underpayment rules bite when:

• you expect to owe $1,000 or more after withholding and credits, and
• your withholding and credits are less than the smaller of 90% of this year's tax or 100% of last year's (110% if last year's AGI was over $150,000; $75,000 married filing separately).

That second branch is the useful one, because last year's total tax is a number you already have. No forecast required.

If your total tax on last year's return was $13,900, four payments of $3,475 cover the safe harbour.

If you are new and had no 12-month prior return, that branch does not exist for you and only the 90% branch is available — which does require predicting income.

The practical version of this is not a percentage at all: take last year's total tax, set four calendar payments at 25% of it, and pay them. You are then inside the safe harbour regardless of how this year goes.

If you fall behind mid-year, don't just pay the next instalment. Publication 505's amended worksheet multiplies your required annual payment by 50% if the next due date is June 15, 75% if September 15, 100% if January 15, then subtracts what you already paid — so the catch-up is deliberately smaller than four equal quarters would suggest. On a $13,900 target: $6,950 by June 15, $10,425 by September 15, $13,900 by January 15.

Interest on a shortfall is set quarterly (the IRS rate page showed 7% for non-corporate underpayments in the fourth quarter of 2026), so it is a priced risk rather than a threat.

Where the money should physically sit

The set-aside only works if it is not spendable. Two notes on that:

• If you park it in a deposit account at an FDIC-insured bank, the FDIC's own page states deposits are automatically insured to at least $250,000 at each FDIC-insured bank — above the amount most solo freelancers hold at quarter time.
• If your business bank account is also your personal one, none of this transfers. Separate first; percentages second.

What to actually do

1. Compute your own set-aside from your own numbers: SE at ~14.13% of profit, plus your bracket's income tax on the reduced base.
2. Compare it to the safe harbour, which needs last year's return, not this year's guess.
3. Set four equal payments from the safe-harbour number and calendar them.
4. Keep the marginal rate visible for pricing decisions.
5. Move the reserve somewhere you have to deliberately take it out.

The full version, including the two spreadsheet tabs that hold the running reserve, is on my site: Nobody Withholds for You — how much to set aside for taxes as a freelancer.

I sell spreadsheet and document kits that carry these rows so the numbers survive being re-run with different inputs — the Freelance Business Kit is the one that has the income/expense tracker this arithmetic feeds into. The method above is complete without buying anything, and nothing here is accounting or tax advice: the year-specific limits move, and the one that matters most to you should be looked up rather than copied from me.