The components of a self-employed person's tax liability

Federal income tax

Federal income tax is calculated on your total taxable income — which includes your business income plus any other income sources, minus deductions. The federal tax system uses graduated brackets, so the rate you pay on your last dollar of income depends on how much you earn in total. For 2024, the brackets range from 10% to 37%.

Self-employment tax

Self-employed individuals pay self-employment tax on their net business income. This covers Social Security (12.4%) and Medicare (2.9%), for a combined rate of 15.3% on income up to the Social Security wage base. Above that threshold, the 2.9% Medicare portion continues, with an additional 0.9% for high earners. You can deduct half of the self-employment tax you pay when calculating your adjusted gross income, which reduces your income tax — but not the self-employment tax itself.

State and local income tax

New York State has its own income tax with rates that range from 4% to 10.9% depending on income level. New York City residents pay an additional city income tax on top of the state tax. These obligations are separate from federal taxes and require their own estimated payments.

Deductions reduce the base

Business deductions reduce your net income, which reduces the amount subject to both income tax and self-employment tax. The deductions available to you — and their size — depend on your business type, your expenses, and whether you qualify for deductions like the qualified business income (QBI) deduction.

Why a single percentage is misleading

Someone earning $40,000 in net business income with no other income sources will have a very different effective tax rate than someone earning $200,000 in business income with a W-2 spouse. The first person may be in a lower federal bracket and owe relatively modest state taxes. The second person may be in a higher bracket, owe the additional Medicare tax, and face New York's top marginal rates.

Entity type also matters. An S-Corporation owner who takes a reasonable salary and distributions may have a different self-employment tax picture than a sole proprietor earning the same total amount. The structure affects the calculation.

A practical approach to setting money aside

Rather than applying a fixed percentage, a more reliable approach is to work with a CPA to estimate your actual projected liability for the year — accounting for your specific income, deductions, entity type, and state obligations. That projection gives you a target, which you can then divide across the quarterly estimated payment deadlines.

If a formal projection is not available, a conservative starting point for many New York business owners is to set aside 30–35% of net business income. This tends to be sufficient for most situations and avoids the more common problem of setting aside too little. If your actual liability turns out to be lower, the excess becomes available at filing time.

The key is to set money aside consistently — ideally as income arrives — rather than trying to accumulate it all at once before a quarterly deadline.

Common mistakes

• Using a percentage that worked for someone else without accounting for differences in income level, entity type, or state.
• Forgetting self-employment tax entirely and only setting aside for income tax.
• Not accounting for New York State and New York City taxes separately from federal.
• Setting aside a percentage of gross revenue rather than net income — which overstates the tax base if you have significant business expenses.
• Spending the money set aside for taxes before the quarterly deadline arrives.

What to do next

If you are not sure whether you are setting aside the right amount, the most useful step is to get a projection of your current year's liability. That gives you a concrete target rather than a guess. A CPA can help you build that projection and identify whether your current estimated payments are on track.