Self-Employment Tax: What Every Freelancer Needs to Know

The Core Difference: No Employer Withholding

When you are an employee, your employer handles two things on your behalf: it withholds income tax from each paycheck and remits it directly to the government, and it pays half of your social security or National Insurance contributions out of its own pocket.

As a self-employed person, you lose both of those conveniences. You are responsible for paying both halves of social contributions — the portion that an employee pays and the portion that an employer pays — and you must file and pay all taxes yourself, on a schedule set by the tax authority.

This is why every freelancer needs to set aside a percentage of every payment they receive. The tax bill does not arrive with your invoice — it arrives months later, often as a large lump sum. If you have spent all the money by then, the bill becomes a crisis.

A widely used rule of thumb: set aside 25 to 35% of gross income for taxes. The higher end of that range is more appropriate in the UK, where National Insurance adds significantly to the total burden. It is better to set aside too much and receive a refund than to be caught short.

US Self-Employment Tax (SE Tax)

In the United States, the self-employment tax (SE tax) is 15.3% of net self-employment income. This breaks down as 12.4% for Social Security and 2.9% for Medicare. As an employee, you would only pay half of this (7.65%), with your employer covering the other half. As a self-employed person, you cover both sides.

SE tax is calculated on your net profit — that is, your revenue minus your allowable business expenses — not on your gross revenue. Tracking and deducting expenses is therefore critical to reducing your SE tax bill.

On top of SE tax, you also pay regular federal income tax at your marginal rate on your self-employment income. However, you are permitted to deduct 50% of the SE tax you paid when calculating your income tax. This deduction partially offsets the extra burden of covering the employer share.

High earners face an additional 0.9% Additional Medicare Tax on self-employment income over $200,000 (single) or $250,000 (married filing jointly).

To illustrate: on $60,000 of net SE income, the SE tax calculation uses a 92.35% factor (the IRS standard adjustment), giving a taxable SE income of $55,410. The SE tax on this amount is $8,478 (15.3%). You then deduct $4,239 (50% of SE tax) from your gross income, leaving approximately $55,761 subject to income tax at your federal marginal rate.

UK: National Insurance for the Self-Employed

In the UK, self-employed individuals pay two classes of National Insurance contributions rather than a single SE tax.

Class 2 NI is a flat rate of £3.45 per week (2024/25) if your profits exceed £12,570 per year. Despite being a small amount, paying Class 2 NI is what qualifies you for the State Pension and certain contributory benefits — so it is important not to overlook it.

Class 4 NI is calculated as a percentage of profits: 6% on profits between £12,570 and £50,270, then 2% on profits above £50,270.

In addition to NI, you pay income tax: 20% (basic rate) on profits from £12,570 to £50,270; 40% (higher rate) from £50,270 to £125,140; and 45% (additional rate) above £125,140.

To illustrate the combined burden: on £40,000 profit, you would owe approximately £7,400 in income tax, £1,703 in Class 4 NI, and £180 in Class 2 NI — a total of roughly £9,283, giving an effective total rate of around 23.2% before any deductions.

You must file a Self Assessment tax return by 31 January each year for the previous tax year. The UK also operates a Payment on Account system, which means you may be required to pay estimated tax in advance — in January and July — based on the previous year total tax bill. This can catch new self-employed people by surprise in their second year.

Registration for Self Assessment is done on the HMRC website. You should register as soon as you begin self-employment, and no later than 5 October in the year after your first self-employed tax year.

Australia: Tax for Sole Traders

Australia does not have a separate self-employment tax. Sole traders simply pay income tax at the standard individual marginal rates on their net business income (revenue minus deductible business expenses). There is no equivalent of the US SE tax or UK NI employer share — but the marginal rates can still be substantial.

The 2024/25 tax rates for individuals are: 0% on income up to $18,200; 19% from $18,201 to $45,000; 32.5% from $45,001 to $120,000; 37% from $120,001 to $180,000; and 45% above $180,000. The Low Income Tax Offset reduces tax by up to $700 for incomes under $37,500.

The Medicare Levy adds 2% on top of income tax for most sole traders, bringing the effective top rate to 47%.

GST (Goods and Services Tax): if your annual business turnover exceeds $75,000, registration for GST is compulsory. You must collect 10% GST on all taxable sales and remit it to the ATO, typically on a quarterly Business Activity Statement (BAS). Businesses under the threshold can register voluntarily, which allows them to claim GST credits on business expenses.

PAYG Instalments: once your income tax bill exceeds $500 in a year, the ATO typically moves you onto the PAYG (Pay As You Go) instalment system, which requires quarterly prepayments of estimated income tax. These prepayments reduce your end-of-year bill but require careful cash flow management.

Canada: CPP and Income Tax for the Self-Employed

Self-employed Canadians face a significant additional burden compared to employees: they must pay both the employee and employer portions of Canada Pension Plan (CPP) contributions.

In 2024, the combined CPP contribution rate for self-employed individuals is 11.9% on net income between the basic exemption of $3,500 and the Year Maximum Pensionable Earnings (YMPE) of approximately $68,500. For an employee, only 5.95% would apply — their employer covers the other half. The self-employed pay all 11.9%.

The enhanced CPP2 tier applies an additional contribution on earnings between the YMPE and the Year Additional Maximum Pensionable Earnings (YAMPE). The rates for this enhanced tier are lower, but they add a further obligation for higher earners.

Federal income tax rates for 2024 are: 15% on the first $55,867; 20.5% from $55,867 to $111,733; 26% from $111,733 to $154,906; 29% from $154,906 to $220,000; and 33% above $220,000. Provincial income tax is added on top of these federal rates and varies significantly by province.

As a partial offset, self-employed individuals can deduct the employer portion of CPP contributions when calculating their federal income tax, reducing the effective burden somewhat.

Quarterly tax instalment due dates in Canada are: March 15, June 15, September 15, and December 15. Missing these dates results in instalment interest charges, so it is worth setting calendar reminders well in advance.

Quarterly Estimated Payments (US)

The IRS requires self-employed individuals to make quarterly estimated tax payments if they expect to owe $1,000 or more for the year. These payments cover both SE tax and income tax and must be made on time to avoid an underpayment penalty.

The four payment due dates are: April 15 (covering January through March), June 15 (April and May), September 15 (June through August), and January 15 of the following year (September through December).

To calculate each payment, estimate your total annual SE tax plus income tax liability, then divide by four. If your income varies significantly month to month, you can also use the annualised income instalment method, which adjusts each quarterly payment to reflect actual income earned in that period — though this requires more record-keeping.

The safest approach is to pay 100% of your previous year total tax liability in four equal instalments — or 110% if your prior year income exceeded $150,000. This safe harbour method means you will not owe any underpayment penalty even if your income grows substantially during the year.

The current IRS underpayment penalty rate is 8% annualised on the shortfall. On a $5,000 underpayment over three months, that is roughly $100 — small but avoidable.

Deductions That Reduce Your Bill (All Countries)

One significant advantage of self-employment is the range of legitimate business expenses you can deduct from your income before calculating tax. Every deduction reduces your net profit, which reduces both your income tax and your self-employment tax or NI contributions.

The most widely applicable deductions across the US, UK, Australia, and Canada include:

• Home office: a proportional share of rent, mortgage interest, utilities, and internet, based on the percentage of your home used exclusively and regularly for work.
• Phone and internet: the business-use portion of your monthly bills.
• Equipment and tools: laptops, cameras, specialist tools, and software subscriptions used for work.
• Professional development: courses, books, and industry conferences directly related to your work.
• Professional services: accountant fees, legal fees, and other business advisory costs.
• Vehicle and travel: business mileage or actual vehicle costs (keep a detailed mileage log — tax authorities scrutinise vehicle claims).
• Health insurance premiums (US only): self-employed individuals can deduct 100% of health insurance premiums for themselves and their family as an above-the-line deduction.
• Retirement contributions: contributions to a SEP-IRA or Solo 401(k) in the US (up to 25% of net self-employment earnings for a SEP-IRA); RRSP contributions in Canada; SIPP contributions in the UK; and superannuation contributions in Australia. These reduce taxable income and build long-term wealth simultaneously.

Record everything with receipts. Cloud accounting software — such as QuickBooks Self-Employed, FreeAgent (popular in the UK), or Wave (free option) — makes expense tracking and quarterly tax estimation far more manageable and reduces the risk of missing legitimate deductions.