Self-Employed Taxes and IRS Notices: A Plain Guide

This section is for people who work for themselves as a regular business: consultants, contractors, hairstylists who rent a chair, photographers, therapists in private practice, tradespeople, and shop owners with no separate corporation. You might use a business name (a "doing business as" or DBA), have a single-member LLC, or even pay a helper or two. If you report your business on Schedule C with your personal Form 1040, this page is for you.

If you have a side gig on top of a job, our gig workers and freelancers guide may fit better. If your business is a partnership or corporation, or you run payroll, see small business owners.

How the IRS taxes a sole proprietor

Schedule C. You report gross receipts and business expenses on Schedule C. The profit flows to your Form 1040, where it is taxed at your regular income tax rates.

Self-employment tax. If your net earnings from self-employment are $400 or more, you also file Schedule SE and pay self-employment (SE) tax. This is Social Security and Medicare tax for people who work for themselves. The rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare. It is applied to 92.35% of your net profit. For 2026, the Social Security part stops once your combined wages and self-employment earnings reach $184,500 (IRS Topic 751). The Medicare part has no cap. An additional 0.9% Medicare tax applies above $200,000 for single filers and $250,000 for joint filers. You deduct half of your SE tax when figuring adjusted gross income. SE tax applies at any age, even if you already collect Social Security.

Qualified business income deduction. This deduction, often called QBID, lets many owners deduct part of their business profit. The 2025 law made it permanent. Beginning in 2026, owners with at least $1,000 of qualified business income from an active business may be able to claim a minimum deduction of $400 (Form 1040-ES, 2026).

Estimate your SE tax and quarterly payments here:

Your IRS calendar for 2026–2027

For 2026, the four estimated payments were due April 15, June 15, Sept. 15, 2026, and Jan. 15, 2027. You generally must pay estimated tax if you expect to owe $1,000 or more. The usual safe harbor is to pay the smaller of 90% of this year's tax or 100% of last year's. Use 110% of last year's if your prior-year adjusted gross income was over $150,000 (Form 1040-ES, 2026). If your income is uneven, as in seasonal work or one large job late in the year, the annualized income method on Form 2210 may lower the penalty.

Deductions that need good records

• Home office. Part of your home must be used regularly and only for business, and it must be your main place of business (with some exceptions). The simplified method allows $5 per square foot, up to 300 square feet (IRS simplified option page). The regular method uses your actual home costs, split by business percentage.
• Vehicle. The 2026 business standard mileage rate is 72.5 cents per mile for January through June and 76 cents per mile from July 1 through Dec. 31, 2026 (IRS standard mileage rates page). Keep a dated log.
• Health insurance and retirement. Self-employed people may deduct health insurance premiums and contributions to retirement plans, subject to rules and limits. For example, the 2026 employee deferral limit for a 401(k), including a solo 401(k), is $24,500 (IRS, IR-2025-111).
• Mixing personal and business. This is the most common problem in Schedule C audits. A separate business bank account and card make it much easier to prove what was business.

Paying contractors and getting an EIN

EIN. An Employer Identification Number is free from the IRS on IRS.gov. You need one if you hire employees, and many sole proprietors get one anyway to keep their Social Security number off W-9 forms. The IRS confirms a new EIN with a CP575.

Form 1099-NEC. If you pay an unincorporated contractor $2,000 or more for services in 2026, you generally must file a 1099-NEC. For payments in 2025 and earlier, the threshold was $600. Payments to attorneys still have $600 rules for some boxes (Instructions for Forms 1099-MISC and 1099-NEC, Rev. December 2026). Get a signed Form W-9 before you pay. If a contractor's name and taxpayer ID number don't match IRS records, you may get a CP2100 telling you to start backup withholding.

IRIS replaces FIRE. If you e-file 1099s yourself, the IRIS Taxpayer Portal is free and handles up to 100 returns at a time (IRS, IR-2026-99).

Hiring an employee brings payroll deposits and quarterly returns. Our small business owners page covers that.

Notices self-employed people get most often

Income and return changes. A CP2000 proposes changes when 1099 income doesn't match your Schedule C. A CP2501 may come first. A CP11 corrects a math or credit error.

Estimated payments. CP23, CP24 and CP25 mean the estimated payments on your return don't match IRS records.

Audits. A Letter 566 opens an audit by mail and asks for records. A Letter 525 proposes changes after a mail audit. A Letter 950 proposes changes after an in-person audit and explains your right to appeal. If the issue isn't resolved, a CP3219A gives you 90 days to petition the U.S. Tax Court.

Balance due and collection. A CP14 starts the billing sequence. A CP504 warns of a levy. An LT11 is a final notice of intent to levy and gives you the right to a Collection Due Process (CDP) hearing, where an independent IRS Appeals officer reviews the case. A Letter 3172 means a federal tax lien was filed.

Common problems and where to start

A Schedule C audit. Gather bank statements, receipts and logs for the items the IRS asks about, and answer by the date on the letter. See IRS audits. If an audit closed without your documents, audit reconsideration may reopen it.

Back taxes from a slow year. See what to do if you can't pay, IRS payment plans, and, if you truly can't pay in full, an offer in compromise or currently not collectible status.

Penalties. Starting with 2025 returns, the IRS's Automatic Exemption from Penalty means a Form 1040 filer with three prior years of timely filing and payment shouldn't be assessed failure-to-file or failure-to-pay penalties. The IRS sends a letter instead. It does not cover the estimated tax penalty. See IRS penalty relief.

Liens and levies. See federal tax liens, IRS levies and CDP hearings.

Unfiled years. See unfiled tax returns.

Getting help. A CPA, enrolled agent or tax attorney can represent you with a power of attorney. Low Income Taxpayer Clinics and the Taxpayer Advocate Service are free options if you qualify.

IRSV.com is an independent guide and is not affiliated with the IRS. This page is general information, not tax or legal advice. Rules change; confirm details on IRS.gov or with a tax professional. Found an error? Tell us.