Self-Employed Money Management: Taxes, Pay, and Retirement

A one-person service business needs a money system. It does not need a perfect income forecast. Record each client payment in the business books. Set aside the tax amount your own estimate calls for. Cover operating costs, then move a planned amount to the household. Review the system when actual profit changes.

This structure will not make every month steady. It will show what the business can afford before one good month turns into personal spending, a missed tax payment, or a cash shortage.

The need is real. In the Federal Reserve's 2025 household survey, 58% of self-employed adults said their income varied from month to month. Twenty-two percent said that variation caused them to struggle with bills. Those figures describe the survey group, not every owner, but they show why an irregular-income plan matters.

Build one clear path for business money

Start with four jobs for cash. These can be separate accounts, bank subaccounts, or bookkeeping categories, depending on bank terms, fees, and the records you can maintain.

Operating money pays normal business costs.

Tax reserve holds the amount supported by your current federal, state, and local estimate.

Business buffer covers slow collections and uneven expenses.

Owner transfer moves an affordable amount to the household.

Do not set a tax percentage from a social-media rule. Do not call every transfer a salary. The right tax reserve depends on profit, other income, filing status, location, credits, and prior payments. Entity and payroll rules can also change how you pay.

Key point: A visible route from receipts to records makes uneven income easier to manage. The IRS says separate business and personal accounts can make recordkeeping easier in its income and expense FAQ.

Separate the records before optimizing the taxes

The IRS says separate business and personal accounts make records easier. That is a strong reason to separate them. Entity, state, and bank rules decide when a separate account is required.

Use the business side for client receipts and business costs. Use the personal side for household spending. When one purchase serves both purposes, record the business portion and keep support for how you calculated it.

Use separate banking as a recordkeeping control. Treat entity formation, contracts, insurance, licenses, and liability as separate decisions for a lawyer or qualified local adviser.

The IRS recordkeeping guide says a business may use any system that clearly shows income and expenses. Keep records that support amounts shown on the tax return. That can include invoices, deposit records, receipts, statements, mileage records, and payroll documents when relevant.

Do this every week:

Match deposits to invoices or sales records.

Classify business expenses.

Save records that support the amounts.

Note how you split mixed-use costs.

Check unpaid invoices.

Match the books to the bank and card records.

Waiting until tax season makes missing records harder to recover and leaves you planning from a bank balance that may already include tax money.

Pay the household from a plan, not from the latest deposit

For a sole proprietor, a transfer from business cash to the owner is generally a withdrawal, not employee wages or a deductible business expense. The IRS Publication 334 discussion of withdrawals explains that boundary. Other entity and payroll rules can be different.

Choose a base household transfer from a conservative view of available cash. A simple starting worksheet is:

Start with collected client cash.

Subtract the tax reserve based on the current estimate.

Subtract due and near-term business costs.

Subtract the planned business-buffer contribution.

The remainder is cash available for an owner transfer or other approved use.

Collected cash matters because an unpaid invoice cannot fund groceries. Profit matters for tax and business health, while bank cash matters for today's payment ability. Track both.

Review period | Question | Action if the answer is no
Weekly | Did every receipt and expense reach the books? | Reconcile before moving more cash.
Monthly | Did collections cover costs, tax reserve, and the base owner transfer? | Cut flexible spending or use the planned buffer rule.
Quarterly | Does the tax estimate still match profit and other income? | Recalculate with current figures.
Twice a year | Are insurance, leave, health costs, and retirement still funded? | Adjust pricing, benefits, or the owner-transfer target.

The household still needs its own budget for irregular income. Base required household bills on a cautious income level. Treat a strong month as a chance to refill taxes, business reserves, household reserves, and future costs before raising fixed spending.

Understand self-employed taxes in layers

Self-employed taxes are not one flat percentage of revenue.

Self-employment tax

Self-employment tax generally covers Social Security and Medicare for people who work for themselves. The IRS self-employment tax page explains that it is figured from net earnings under tax rules. It is not simply 15.3% of every client payment, and it is not the whole tax bill.

Federal income tax

Federal income tax depends on taxable income and the rest of the return. Filing status, other household income, deductions, credits, and prior payments can change the result.

State and local obligations

State income or franchise taxes, sales taxes, gross-receipts taxes, business licenses, and local rules vary. The federal worksheet does not settle those duties.

This is why a fixed 25% or 30% tax sweep can be too high for one owner and dangerously low for another. Use a current calculation from Form 1040-ES guidance, tax software that reflects your facts, or a qualified tax professional.

Make estimated payments from current numbers

Federal income tax is pay as you go. When withholding does not cover enough, estimated payments may be required. The IRS estimated-tax page explains the general threshold and exceptions. The calculation belongs to the full return, not one invoice.

For the 2026 tax year, the first three standard federal due dates are April 15, June 15, and September 15, 2026. The fourth is January 15, 2027. The periods are not three equal calendar months. The Taxpayer Advocate Service lists the 2026 estimated-payment schedule.

Key point: Estimated taxes are a pay-as-you-go system, and the four federal payment periods are uneven. Confirm the amount and current dates with the IRS estimated-tax guidance and your own return facts.

Use this payment routine:

Project business profit, not just revenue.

Add other income and expected withholding.

Apply the current Form 1040-ES worksheet or qualified software.

Include state and local calculations separately.

Schedule the payment through an official channel.

Save the confirmation in the tax records.

Recalculate after a large client win, lost contract, marriage, job change, or other material tax change.

The tax-planning guide explains the difference between planning, filing, and unsupported tax promises.

Deduct business expenses with evidence

A business expense is not deductible merely because it was paid from a business card. The expense must meet the applicable tax rules. Personal expenses are not deductible business expenses.

Schedule C asks sole proprietors to report business income and expenses by category. Use the current Schedule C instructions, especially for items with special rules such as vehicles, home-office use, meals, depreciation, inventory, and payments to other people.

Cost | Record to keep | Boundary to check
Software or subscriptions. | Keep the invoice, date, business purpose, and payment. | Check for personal or bundled use.
Equipment. | Keep the receipt, start-of-use date, and business-use support. | Check depreciation and mixed use.
Vehicle use. | Keep a timely mileage record and trip purpose. | Separate commuting from business travel.
Contractor payment. | Keep the agreement, invoice, payment, and required tax forms. | Check worker class and reporting.
Home workspace. | Keep measurements, costs, and use records. | Check exclusive-use and other current rules.

Do not create a purchase just to get a deduction. A deduction may reduce taxable income; it does not make the item free.

Hold both a business buffer and a household reserve

The business buffer protects operations. The household emergency fund protects personal bills. They solve different problems.

Size the business buffer around slow-paying clients, fixed costs, large refunds, and seasonal gaps. Also ask how long it could take to replace a lost client. Size the household reserve around needed personal spending and income risk. The emergency-fund guide gives a framework without pretending one number fits every owner.

Also plan for benefits an employer used to handle: health coverage, disability coverage, time off, equipment replacement, and retirement. Self-employed people without employees can review individual Marketplace coverage through HealthCare.gov. Eligibility and savings depend on household and income facts.

Compare a SEP IRA and one-participant 401(k)

A regular IRA may be enough for some owners. The Roth IRA guide covers the 2026 IRA limit, income rules, and withdrawal details. A business retirement plan adds different contribution and administration choices.

A one-participant 401(k), often called a solo 401(k), is for an owner with no employees other than a spouse. The owner can pay into it in employee and employer roles. Pay, plan, combined-limit, and tax rules still apply. For 2026, the general employee elective-deferral limit is $24,500, while employee and employer contributions share a $72,000 overall limit before catch-up contributions. Deferrals in other work plans can affect the room, so do not treat each plan as a fresh limit. The IRS one-participant 401(k) page explains the two roles.

A SEP IRA uses employer payments. It does not offer the same basic employee deferral. For 2026, the general SEP limit is the lesser of 25% of pay or $72,000. Self-employed owners must use a special calculation. See the IRS SEP contribution limits.

Key point: A one-participant 401(k) can use employee and employer contributions, while a SEP IRA uses an employer contribution. Both have a $72,000 2026 overall ceiling before catch-ups, but the owner's actual room requires a separate calculation. See the IRS one-participant 401(k) guidance and SEP rules.

Feature | One-participant 401(k) | SEP IRA
Contribution roles. | The owner may pay in as employee and employer. | The employer pays under SEP rules.
Employee boundary. | Intended for an owner-only business, or owner and spouse. | Employee rules can require payments for other staff.
2026 overall limit. | Employee and employer contributions share a $72,000 ceiling before catch-ups; the personal calculation can be lower. | Lesser of 25% of pay or $72,000 before the owner calculation.
Administration. | Plan document, deadlines, and possible Form 5500-EZ filing. | Often simpler, but employee and equal-rate rules matter.

The top-line limit is not the amount every owner may contribute. Profit, compensation, entity type, other plans, employee status, age, and deadlines matter. Read the plan document and calculate from current IRS rules. The 401(k) guide covers the broader plan mechanics.

Know when specialist help is needed

Bring in a bookkeeper when the records are late or unreliable. Bring in a tax professional for estimated-tax calculations, entity elections, payroll, multi-state work, worker classification, or a return you cannot support. Bring in a lawyer for entity protection, contracts, ownership, or state-law questions. An insurance professional can explain policy design, but you still need independent price and coverage comparisons.

Do not choose an S corporation from a social-media profit threshold. Ask a tax professional to compare current payroll, state, filing, administrative, and reasonable-compensation rules under your facts before an election. The IRS explains the S corporation structure and its compensation boundary.

Common questions

What is the self-employment tax rate?

The familiar calculation includes Social Security and Medicare rates, but it is not a flat percentage of every dollar collected. It is figured from net earnings under IRS rules, and income tax can apply separately.

Do self-employed people have to pay quarterly taxes?

Some do. Estimated-payment duties depend on the expected tax, withholding, credits, prior-year facts, and exceptions in current rules. Use Form 1040-ES or qualified help instead of guessing from revenue.

How much should I save for self-employed taxes?

There is no safe universal percentage. Calculate from projected profit, household income, filing status, location, credits, and payments already made. Recalculate as those inputs change.

Is an owner draw the same as salary?

No. A sole proprietor's withdrawal is generally not employee wages or a deductible business expense. Corporations and payroll have different rules.

Can I deduct every expense paid by the business account?

No. The payment account does not decide deductibility. The cost must satisfy the tax rule, and mixed personal use may need support and allocation.

Do I need a separate business bank account?

Entity, bank, and state rules vary, but separate accounts usually make records clearer. Opening the account by itself does not create an LLC or liability shield.

Is a solo 401(k) always better than a SEP IRA?

No. Contribution room, employee status, other plans, deadlines, paperwork, and desired features can change the choice. Compare both from the same profit estimate.

This guide is general education for a U.S. one-person business. Tax, retirement, employment, entity, and insurance rules depend on facts and can change. Use current forms and qualified help for a filing, election, or plan contribution.

Sources

Federal Reserve, "Income and Expenses," Economic Well-Being of U.S. Households in 2025. Accessed July 31, 2026.

IRS, "Self-Employment Tax". Accessed July 31, 2026.

IRS, "Estimated Taxes". Accessed July 31, 2026.

Taxpayer Advocate Service, "Estimated Payments". Accessed July 31, 2026.

IRS, "Income and Expenses 1". Accessed July 31, 2026.

IRS, "What Kind of Records Should I Keep?". Accessed July 31, 2026.

IRS, "Instructions for Schedule C". Accessed July 31, 2026.

IRS, "One-Participant 401(k) Plans". Accessed July 31, 2026.

IRS, "SEP Contribution Limits". Accessed July 31, 2026.

IRS, "401(k) Contribution Limits". Accessed July 31, 2026.

HealthCare.gov, "Health Coverage if You're Self-Employed". Accessed July 31, 2026.

IRS, Publication 334, "Tax Guide for Small Business". Accessed July 31, 2026.

IRS, "S Corporations". Accessed July 31, 2026.

IRS, "S Corporation Compensation and Medical Insurance Issues". Accessed July 31, 2026.