There's a number buried in the tax code that surprises a lot of new freelancers: $400. Earn more than $400 in net self-employment income in a year and you owe self-employment tax - even if it's a hobby, even if it was one client, even if you made less than the standard deduction and owe no income tax at all.

Here's what's actually going on.

What the $400 triggers

Self-employment tax is Social Security + Medicare for people without an employer. It's 15.3% of your net self-employment income (12.4% Social Security + 2.9% Medicare). When you're a W-2 employee, your employer pays half and you never see it. When you freelance, you pay both halves.

The moment your net freelance profit crosses $400 for the year, you file Schedule SE and pay it.

What counts

Net income is revenue minus business expenses. So:

  • $600 from two Etsy sales, minus $150 in materials and fees = $450 net. Over the line.
  • $5,000 from one consulting gig, minus $1,200 in software, coworking and mileage = $3,800 net. Well over.

Side note: platforms only send a 1099-K or 1099-NEC above certain thresholds. The IRS expects the income reported whether or not a form shows up.

The part that stings

Self-employment tax is on top of income tax. A freelancer in the 12% bracket pays roughly 25-27% combined on each profit dollar. That's why the standard advice is to set aside 25-30% of every payment the day it arrives.

I built a free one-sheet calculator for exactly this - enter a payment amount and it shows what goes to taxes and what you actually keep: free set-aside calculator.

The upside hiding in the rule

Crossing $400 also means you're "in business" - and business expenses become deductible. Software, equipment, home office, a share of your phone bill, mileage. Every legitimate expense shrinks the number the 15.3% applies to.

Track them from day one, not in March. A spreadsheet with a date, amount, and category column beats a shoebox of receipts.

The quarterly wrinkle

Once you owe, you owe quarterly. Estimated payments are due April 15, June 15, September 15, and January 15. Miss them and the IRS charges an underpayment penalty even if you pay in full when you file.

The freelancers who never stress about taxes do two boring things: move 25-30% of every payment to a separate account immediately, and check the four dates a week early. That's the whole system.

Not tax advice - confirm your situation with a CPA or IRS.gov.