Freelancing or consulting on the side: self-employment tax and quarterly estimates

Consulting for a few clients, driving for an app, selling services online or running a side business all produce income with no employer withholding. The US treats it differently from a salary, and the first-year surprises are large.

First, are you allowed to?

Tax rules and work permission are separate things. An H-1B worker is generally authorised to work only for the employer that sponsors the visa. F-1 students and OPT workers have their own limits. An H-4 spouse with an Employment Authorization Document, a green card holder or a citizen can generally take on freelance work. Whether an activity counts as "work" for immigration purposes is a question for an immigration lawyer, not for the tax return. The IRS will tax the income either way.

The tax: income tax plus self-employment tax

Self-employed people pay the employer and the employee halves of Social Security and Medicare themselves. The rate is 15.3% on 92.35% of net earnings: 12.4% for Social Security up to an annual wage base ($176,100 for 2025, and it rises each year), and 2.9% for Medicare with no cap, plus an additional 0.9% Medicare tax at higher incomes. Half of the self-employment tax is deductible in working out income tax. It is calculated on Schedule SE.

On top of that, ordinary income tax applies to the profit. Business income and expenses go on Schedule C. A deduction of up to 20% of qualified business income may be available, with limits that depend on income and the type of business.

Quarterly estimated tax

Nobody withholds anything, so you pay as you go. The IRS expects estimated payments if you will owe $1,000 or more when you file. Form 1040-ES is the voucher, and you can also pay online or through your IRS account.

To avoid the underpayment penalty you generally need to have paid the smaller of 90% of this year's tax or 100% of last year's. If last year's adjusted gross income was above $150,000, the second figure is 110% of last year's tax. The safe harbour is the practical tool: pay a quarter of last year's tax, or of 110% of it, each quarter and the penalty is avoided even if the actual bill is higher. Publication 505 has the rules.

Salary withholding can be used instead of estimates. Raising the W-4 withholding in the last months of the year counts as if it had been paid evenly. See the withholding article.

What you can deduct

• Costs that are ordinary and necessary for the work: software, equipment, professional fees, travel, a share of your phone and internet.
• A home office, if a part of the home is used regularly and only for the work.
• Health insurance premiums, if you are not eligible for employer coverage.
• Contributions to a retirement plan for the self-employed, which also reduce income tax.

Keep a separate bank account and records from the first day. Mixed accounts are the main reason that expenses cannot be supported later.

India angles

• Indian clients. Payments from India are still income, even with no US form. You may owe Indian tax or have Indian tax deducted at source. Ask for the certificate, because the Indian tax may be creditable on Form 1116.
• A business account in India is a foreign account for FBAR purposes, and the business may need its own filings.
• A company in India. If you own an Indian company, read the foreign business forms article.
• State tax. Many states have their own estimated tax schedule and some tax business activity separately. See state taxes.

Checklist

1. Confirm work permission first.
2. Open a separate account and record income as it arrives.
3. Set aside roughly a third of profit until you know your real rate.
4. Make estimated payments on the four dates, using the safe harbour if income is lumpy.
5. Keep invoices, mileage and receipts for the return.