Self-Employment Tax: The Piece Employees Don't Pay
When you worked for someone else, your employer paid half of your Social Security and Medicare tax and you paid the other half through payroll withholding. As a consultant working for yourself, you owe both halves, reported on Schedule SE. That's the self-employment tax, and it runs 15.3% on your net self-employment earnings: 12.4% for Social Security up to the annual wage base (this cap rises each year, so check the current year's figure) and 2.9% for Medicare with no cap at all. If your combined wages and consulting income push above $200,000 single or $250,000 married filing jointly, an extra 0.9% Medicare surtax kicks in on the amount over that threshold.
The good news: you get to deduct half of your self-employment tax on Form 1040, and self-employment tax is calculated on net income after business expenses, not your gross billings.
Federal Income Tax on Top
Self-employment tax is separate from income tax. Your consulting profit (revenue minus deductible expenses like software, home office, travel, and health insurance premiums) also gets taxed at ordinary federal income tax brackets, currently ranging from 10% to 37% depending on your total taxable income and filing status. Because brackets are marginal, your effective rate is almost always lower than your top bracket. Add state income tax on top if you live in a state that taxes income, and your all-in marginal rate on the last dollar of consulting income can easily land between 30% and 45% for higher earners.
Why Consulting Income Gets Taxed As An SSTB
There's a wrinkle specific to consultants: the 20% Qualified Business Income deduction under Section 199A. This deduction can shelter a chunk of pass-through business income from tax, but consulting is explicitly named a "specified service trade or business" (SSTB) in the tax code, alongside law, medicine, and financial services. That means if your taxable income rises above the annual phase-out threshold (adjusted yearly, check the current figure), the QBI deduction shrinks and eventually disappears for high-earning consultants, even though other business owners at the same income level might still get the full deduction. Fractional executives and strategy consultants billing premium rates often hit this phase-out, which is one more reason take-home pay feels lower than the invoice total suggests.
How Much To Set Aside And When To Pay
Because no one withholds tax from retainer checks or project invoices, you're responsible for paying as you go through quarterly estimated taxes using Form 1040-ES, generally due in mid-April, June, September, and January. Underpaying can trigger a penalty even if you pay in full by the filing deadline.
A practical rule of thumb: set aside 25% to 30% of every payment you receive if your income is moderate, and closer to 35% if you're in a higher bracket, owe state tax, or expect to cross the additional Medicare threshold. Because consulting income is often lumpy, project one month and dry the next, base your quarterly payments on year-to-date actual earnings rather than a flat guess, and revisit the estimate whenever you land a new retainer or lose one.