Earning Without a Pay Stub: Self-Employment Tax, Estimated Payments, and the Side Gig
I'm Andy Temte and welcome to Money Lessons! Join me every Saturday morning for bite-sized lessons that are designed to improve financial literacy around the world. Today is October 3, 2026.
Last Saturday we added up what one employee's job was worth once the employer's spending was counted, and I closed by naming three things an employer does that no one does for the self-employed: no employer withholds your taxes, pays half of your Social Security and Medicare taxes, or offers you benefits. Three weeks ago, in the pay stub episode, I promised that earning without a pay stub would get an episode of its own in early October. Today is that episode.
Five Terms We Need
Let's start with five definitions, because today's lesson uses every one of them.
The first term is self-employed. You are self-employed when the money you earn comes from customers or clients rather than from an employer: you run a business of your own, you do contract work for other businesses, or you drive, deliver, sell, or build on the side. In the first episode of this series, back on August 8th, I named three ways money arrives in your personal economy — a paycheck lands in your account, a customer pays your invoice, a side gig pays out — and the second and third of those are self-employment. A side gig is self-employment done alongside a regular job, and everything today applies to it, on a smaller scale. The Bureau of Labor Statistics counted about 9.5 million self-employed workers in August 2026, and that count includes only people working in their own name, not through a company they set up.
The second term is the 1099. Last Saturday we defined the W-2 as the form your employer sends you every January reporting your pay and the taxes withheld. A 1099 is the form a business sends you when it paid you for work without hiring you as an employee — the IRS calls you an independent contractor — and it reports what the business paid you and nothing more, because nothing was withheld.
The third term is net earnings. Net earnings are what's left of the money your customers paid you after you subtract the costs of doing the work — the supplies, the mileage, the software. The taxes we're about to define are figured on net earnings, not on the total your customers paid. How to track those costs is bookkeeping, which is a small-business subject and not today's lesson.
The fourth term is self-employment tax. Self-employment tax is Social Security and Medicare tax paid by a self-employed person, and it is both halves: the employee's half that appeared on your pay stub three weeks ago, and the employer's half we added up last Saturday. The rate is 15.3 percent of net earnings, which is 12.4 percent for Social Security and 2.9 percent for Medicare.
The fifth term is estimated payments. Three weeks ago we defined withholding as your employer holding back part of your pay and sending it to the IRS on your behalf, as a prepayment of your income tax. When you're self-employed, no one holds back anything, so you send the prepayment yourself, four times a year, and those four payments are your estimated payments.
With those five terms defined, let's work through the tax bill.
The Bill for Both Halves
Let's use the same figure we used last Saturday: $50,000. Last Saturday it was a salary. Today it is net earnings — $50,000 left after the costs of doing the work.
On last Saturday's pay stub, the employee's half of Social Security and Medicare was 7.65 percent of pay, and the employer paid the same 7.65 percent out of its own money, about $3,700 for the year. Today there is no employer, so the self-employed person pays the whole thing.
Now, two adjustments, so that an expert listening doesn't write to me. The IRS applies the 15.3 percent to a little less than the full $50,000 — about 92 percent of it — so the self-employment tax on $50,000 of net earnings comes to about $7,100. And half of that tax, roughly $3,500, is deductible when your income tax is figured. Both adjustments make the bill smaller than a plain 15.3 percent of $50,000 would be.
The lesson is this: the Social Security and Medicare line that took one half out of the employee's paycheck takes both halves out of the self-employed person's earnings.
Paying As You Go
The next thing no employer does for you is withhold your taxes. The federal income tax is a pay-as-you-go tax — the IRS expects to receive most of what you owe during the year you earn it, not the following April — and withholding is how an employee pays as they go.
Before 1943 there was no withholding at all; every American who owed income tax paid it after the fact, on a return filed the following March. The Second World War changed who paid. In 1939, fewer than four million Americans owed federal income tax; by 1945, more than forty million did, and Congress could not collect a full year's tax after the fact from forty million households, most of them paying for the first time. So the Current Tax Payment Act, signed into law on June 9, 1943, required employers to withhold tax from every paycheck. Fun fact, to keep taxpayers from owing two years of tax in one, Congress forgave 75 percent of the smaller of each taxpayer's 1942 or 1943 bill, and if that smaller bill was $50 or less, Congress forgave all of it.
A self-employed person pays as they go with estimated payments, and does the estimating too. Four times a year — in April, June, September, and the following January — you send the IRS a payment. Each payment covers both the income tax and the self-employment tax on what you earned in the months before it.
How much do you send? The IRS gives you a safe harbor, which is a plain rule that keeps you clear of any penalty: if your four payments add up to at least the total tax on last year's return, you owe no penalty, even if you end up owing more when you file. And if the amount you still owe when you file is under $1,000, there is no penalty either. Send too little during the year, and the IRS charges an underpayment penalty, which works like interest on the money you should have sent and didn't.
The point I'd like you to focus on is that the self-employed person is still on the pre-1943 system, with one change: instead of settling up after the year ends, the IRS wants four installments during it, and it wants you to do the estimating.
The Side Gig
Now let's talk about the side gig, and two things in particular.
First, every dollar your side gig earns is taxable, even when no 1099 ever arrives. A business that paid you for work as an independent contractor sends a 1099 only if it paid you $2,000 or more in the year, a threshold that rose from $600 this year. An app or payment platform—like Square—that collected money from your customers sends its version of the 1099 only if it moved more than $20,000 through your account in more than 200 transactions. Below those thresholds, no form comes — and you still owe the tax. Self-employment tax is owed on net earnings of $400 or more, and every dollar of net earnings counts toward your taxable income.
Second, side income lands on top of your wages. Two weeks ago we defined the marginal tax rate as the rate of the highest bracket your taxable income reaches, the rate on the last dollar you earn. Side-gig dollars are added to the wages you already earn, so they land in your highest bracket and are taxed at your marginal rate. For the single filer we followed two weeks ago, already at $60,000 of taxable income, a $3,000 side gig is taxed at 22 percent, and the self-employment tax comes on top of that. Alternatively, a $3,000 raise arrives with the taxes already taken out.
The Benefits Nobody Pays For
The third thing no employer does for you is provide benefits. Last Saturday's employee, on a $50,000 salary, had $13,100 of benefits paid for by the employer. A self-employed person with $50,000 of net earnings receives none of that from an employer, and pays for whatever coverage and savings they want out of the same $50,000. Health coverage is bought on your own, and we'll cover how when we reach insurance later in this series. Retirement saving happens in accounts built for the self-employed, with no employer and no match, and we'll cover those when we reach retirement accounts. And there is no employer-paid disability coverage and no paid sick leave, so the emergency fund carries more weight when there's no employer behind you.
What This Means for You
There are two things to focus on from today's episode. First, when you're self-employed, no one is setting money aside for your taxes, so you have to. When a customer pays you, the whole payment lands in your account, and it feels like income. But some of that payment is the income tax and the self-employment tax you'll owe on it, and nobody has taken that out for you. Prudent management of your personal economy, when you earn without a pay stub, is to set money aside for taxes from every payment on the day it arrives, before you spend any of it. The simplest way is a separate account, used only for taxes, so the tax money and the spending money never sit in the same place. On August 29th we talked about friction, and a separate tax account is friction you put in your own way, on purpose.
Second, when you're self-employed, the tax deadlines are yours, not your employer's. An employee never thinks about when their estimated income tax gets sent to the IRS, because the payroll system sends it every payday. A self-employed person sends it four times a year — in April, June, September, and January — and no one will send it for you or remind you. Put the four dates on your calendar.
Next Saturday we turn from what you earn this year to what you can earn over a working life: human capital, the skills and earning power that are the largest asset most people will ever own, and why building them is the highest-return investment available to you.
Until next week... Grace. Dignity. Compassion.
