Chapter 11: Self-employment: quarterlies, QBI, and the S-corp question

Priya cleared $140,000 of profit from her design consultancy in 2026, and not one dollar of it was withheld. No employer quietly sent the IRS its share each payday, because Priya is the employer. Self-employment swaps the W-2 world's autopilot for three jobs you must do yourself: pay both halves of the payroll tax, send the IRS money four times a year on a schedule it picked, and claim the deductions Congress built for people like you. None of the three is hard. All three punish neglect.

SE tax: both halves of the paycheck tax

Employees split the 15.3% payroll tax with their employer: 7.65% withheld, 7.65% paid invisibly on top. Work for yourself and both halves are yours, renamed self-employment tax: 12.4% for Social Security (up to the annual wage base, which is far above Priya's income) plus 2.9% for Medicare. Two mercies soften it. The tax applies to only 92.35% of your net profit, a stand-in for the employer half that employees never see counted as wages. And half of the SE tax is deductible on the way to AGI, whether or not you itemize.

Priya's numbers: 92.35% of $140,000 is $129,290, and 15.3% of that is $19,781. Half of it, $9,891, comes off her income before AGI.

Stack SE tax on income tax to see the real price of the next dollar. An extra $1,000 of profit costs $141 of SE tax, and about $929 of it survives into taxable income, where Priya's 22% bracket takes roughly $204 more. She keeps about $650. The QBI deduction below hands back about $40 of that, so call her true keep-rate just under 70 cents on the marginal dollar. Knowing that number is what lets her price a new project, and a tax-deductible expense, correctly.

Quarterly estimates without fear

The IRS wants its money as you earn it. Employees comply through withholding; the self-employed comply through estimated taxes, four payments a year. Miss them and the penalty is an interest charge that accrues quarter by quarter, not a fine for sloppiness, and it is entirely avoidable because the rules publish their own answer key. There is no penalty for the year if any one of these holds:

Notice the quarters are not quarters: the second covers two months and the fourth covers four. Put all four dates in your calendar today, because the IRS will not remind you.

The calculator above takes last year's tax, this year's AGI, and what you have paid so far, then tells you the smallest payment that keeps each remaining quarter penalty-free.

One rescue worth knowing: withholding is treated as paid evenly through the year no matter when it actually happens. Estimated payments are credited only on the date they arrive, but tax withheld from a December paycheck, a spouse's W-4 adjustment, or a year-end retirement-plan withdrawal counts as if it had flowed in since January. A household that discovers a shortfall in November can often erase the whole year's penalty with one December withholding boost, a move no estimated payment can replicate.

QBI: the 20% haircut the IRS gives your profit

The qualified business income (QBI) deduction lets most self-employed people deduct 20% of their business profit, and OBBBA made it permanent. It is a deduction, not an adjustment: it reduces taxable income after AGI, alongside your standard deduction, with two caps. The deduction cannot exceed 20% of your taxable income before it, and specified service businesses (health, law, accounting, consulting, financial advice, performance) phase out of the benefit once taxable income climbs past roughly $200,000 single or $400,000 joint, with wage-and-asset limits hitting other businesses at the same heights. Below those lines, the deduction is unconditional. Priya sits far below, so she gets it in full no matter how her work is labeled.

Her whole year, traced:

The QBI line is doing quiet work: $22,802 shielded from the 22% bracket saves about $5,016. Note the cap in action: 20% of her qualified income would be $26,022, but the deduction tops out at 20% of taxable income before it, $22,802. Software gets this right; back-of-envelope math usually misses it.

Deductions that survive an audit

Self-employment forums overflow with aggressive deduction folklore. Three categories do the heavy lifting, hold up under scrutiny, and deserve your attention before any exotic ones.

The S-corp question, honestly

Somewhere past six figures, every freelancer hears the pitch: elect S-corporation status and stop paying SE tax. The mechanism is real. An S-corp pays you a salary through actual payroll, with normal payroll taxes, and passes the remaining profit to you as distributions that escape SE tax entirely. The IRS's counterweight is the reasonable salary rule: your wage must match what hiring someone to do your job would cost. Pay yourself $20,000 to label $120,000 as distributions and you have filed an audit invitation.

The honest ledger. If Priya elected S-corp status and a defensible salary for her work were $90,000, about $50,000 would flow as distributions, saving roughly 15.3% of it, near $7,650 a year. Against that: payroll service fees, a separate business tax return, state fees and minimum taxes (California charges $800 plus 1.5% of profit), bookkeeping formality, and a smaller solo 401(k) employer contribution, since that side is now capped at 25% of the W-2 salary alone. Net of costs, the win is real but far smaller than the pitch, and it shrinks fast at lower profits because the reasonable salary swallows most of the pie. Below roughly $80,000 of consistent profit, the savings rarely clear the overhead; above it, the election starts earning its keep, provided the profit is steady rather than one good year. A CPA earns their fee here, both on the breakeven math and on defending the salary number.

Where people go wrong

• Skipping a quarter because cash is tight. The penalty clock runs per quarter; catching up in January does not erase June.
• Spending the tax bucket. That 30% was never income. Keep it in a separate account where it does not look like money.
• Computing the keep-rate at the bracket rate alone. Priya's next $1,000 faces SE tax and income tax together; budgeting at "22%" overstates her take by hundreds.
• Fearing the home office while missing the solo 401(k). People skip a $1,500 deduction out of audit anxiety, then leave a $50,000 deduction unopened.
• Electing S-corp after one great year. The overhead is annual and certain; the savings need steady profit to outrun it.

Key takeaways

• SE tax is 15.3% on 92.35% of net profit, with half deductible: $19,781 on Priya's $140,000, and a marginal keep-rate of about $650 per $1,000 before QBI, just under $700 after.
• No penalty if you owe under $1,000, paid 90% of this year, or paid 100% of last year's tax (110% above $150,000 AGI). Dates: April 15, June 15, September 15, January 15.
• Withholding counts as paid evenly all year, so a December withholding boost can rescue an underpaid year; estimated payments cannot.
• QBI, now permanent, deducts 20% of profit (capped at 20% of taxable income): $22,802 for Priya, about $5,016 saved. Service businesses lose it only at roughly $200,000/$400,000 of taxable income.
• The deductions that matter: home office, health premiums, and above all the solo 401(k)'s roughly $50,000 of room.
• The S-corp saves real money only above roughly $80,000 of steady profit, after payroll costs and a reasonable salary; below that it costs more than it saves.

Sources: IRS: Estimated Taxes · IRS: One Big Beautiful Bill Provisions · IRS: 2026 Tax Inflation Adjustments · Finvest Personal Finance Guide