Updated August 7, 2026. Quick answer: your first self-employed year is the easiest year to stay out of trouble and the year most people panic in. The reason is the prior-year safe harbour: it is measured against the tax on a return in which you had little or no self-employment income, so the bar is low. The year that actually catches people is year two, when that same test is measured against your first full self-employed year. And if you are retired with a pension or an IRA you are drawing from, you may not need to make estimated payments at all — there is a route that uses withholding instead. The mechanics of the safe harbour, the four dates and the withholding move all live on one page; this page is about what is different in the first year.
On deductions by profession: tax deductions by profession and tax deductions for insurance agents.
On records for a one-person business: estimated tax payments and their confirmations.
On records for a one-person business: how to record owner draws as a sole proprietor and a quarterly bookkeeping close checklist.
On receipts and records for a one-person business: IRS receipt rules for business expenses and the $75 rule, whether scanned receipts replace paper under Rev. Proc. 97-22 and how to invoice reimbursed client expenses and report them on Schedule C.
IRS worksheet walk-throughs: Pub 505 Worksheet 2-12.
Picking the Schedule C business code for your work (2025 chart): Schedule C code for musicians and performers, Schedule C code for movers and Schedule C code for masons and concrete contractors.
Picking the Schedule C business code for your work (2025 chart): Schedule C code for graphic designers, Schedule C code for travel agents and Schedule C code for painters.
Publication 505 worksheets for 2026: Estimated Self-Employment Tax Worksheet 2-3.
IRS worksheets read line by line: Form 2210 Schedule AI.
Related reading on this site: IRS Tax Topic 554.
Related reading on this site: IRS Tax Topic 420.
Related reading on this site: IRS Tax Topic 158.
Picking the Schedule C business code for your work (2025 chart): Schedule C code for tutors and teachers, Schedule C code for online sellers and Schedule C code for bookkeepers.
Picking the Schedule C business code for your work (2025 chart): Schedule C code for consultants, Schedule C code for real estate agents and Schedule C code for hair, nail, and beauty.
Schedule C and Schedule SE (Form 1040) for 2025, read line by line: Schedule C lines 8 and 9, Schedule C lines 27a to 29 and Schedule C Part III.
Related reading on this site: 2026 Estimated Tax Worksheet.
Schedule 1 (Form 1040) for 2025, read line by line: Schedule 1 lines 15 and 16 and Schedule 1 line 17.
Form 1040 for 2025, lines 12 to 38 read line by line: Form 1040 lines 22 to 24, Form 1040 line 26 and Form 1040 line 38.
Related reading on this site: Form 1040 due date 2027, Estimated tax due dates 2027 and Form 1099-NEC filing deadline.
The employee copy of Form W-2, read box by box: W-2 box 13 statutory employee.
The employee copy of Form W-2, read box by box: W-2 box 2.
The recipient copy of Form 1099-G or 1099-K, read box by box: 1099-G boxes 4 to 9, 1099-K box 1a and 1099-K boxes 1b, 2, 3.
The recipient copy of Form 1099-NEC or 1099-MISC, read box by box: 1099-MISC box 3, 1099-MISC boxes 5, 9, 11 and 1099-MISC box 6.
More IRS forms and schedules, read line by line: Form 8300 instructions and Form 8832 instructions.
More IRS forms and schedules, read line by line: Schedule 1 (Form 1040) guide, Schedule C instructions and Form 8829 instructions.
The underpayment interest rate for each quarter of 2026: the IRS interest rates for each quarter of 2026.
More IRS forms and schedules, read line by line: Form 2210 instructions.
Why year one is the easy one
The IRS states the tests plainly: you avoid the underpayment penalty by paying, through withholding or estimates, “90% of the tax to be shown on your current year’s tax return, or 100% of the tax shown on your prior year’s tax return or 110% of the tax shown on your prior year’s tax return if the adjusted gross income for that year was greater than $150,000 ($75,000 if married filing separately).”
Read the prior-year test against your own situation. If last year you were employed, or retired and not yet self-employed, then the tax shown on that return is the whole target — and it has nothing to do with how well the business does this year. A first year that goes unexpectedly well does not raise the bar. It raises next year’s.
That is the trap, and it is a delayed one. Year two’s prior-year test is measured on year one, self-employment tax included. So the year people relax — the business worked, the first tax bill was survivable — is the year the required payments step up. If you set aside the same amount in year two that worked in year one, you will be short.
If you have a pension or an IRA, you may not need to pay quarterly at all
This is the part almost nobody tells a newly self-employed retiree. Tax withheld from a pension, an annuity or an IRA distribution is not credited on the day it is withheld. The IRS’s own instructions for Form 2210 state the default: “you are considered to have paid one-fourth of these amounts on each payment due date unless you can show otherwise.”
The practical consequence is large. Withholding taken out in December counts as though a quarter of it had been paid back in April. So a retiree who takes a year-end IRA distribution with tax withheld, or who raises the withholding on a pension, can cover a self-employment tax liability that estimated payments would have had to cover on four separate dates — and can do it after the year’s income is actually known rather than guessed at in April. The full mechanics, the dates and the arithmetic are on the safe-harbour page, which owns this move; what is worth adding here is that it is available to you precisely because you have retirement income to withhold from, which most newly self-employed people do not.
If the income arrives unevenly
Consulting income in the first year is rarely spread across four equal periods, and the standard method assumes it is. The alternative is the annualised income installment method, which lets you match payments to when the income actually arrived rather than to the calendar — it is more paperwork and it is worth it in exactly one situation: a year that is heavily weighted to the second half. Paying a flat quarter each period on income you had not yet earned is the error it exists to fix.
What to actually do in year one
- Find last year’s total tax — not last year’s refund, and not your income. That figure is your prior-year target.
- Decide the route before April: estimated payments, or withholding from retirement income, or a combination. The comparison is there.
- Open the separate business account first if you have not — it is what makes the year-end arithmetic possible at all.
- Set year two’s number in the same session, while you can see what year one actually produced. This is the whole point of the page.
The tax itself is the other half of the surprise: self-employment tax is 15.3% and it sits on top of income tax, which is why a first-year set-aside based on income tax alone is roughly half of what it needs to be.
Sources and limits
Safe-harbour percentages and the $150,000/$75,000 threshold quoted 2026-08-07 from the IRS’s estimated tax FAQs; the withholding-timing default from the Instructions for Form 2210 (tax year 2025 revision, reviewed 30 April 2026) — we are quoting the most current revision published, and it is stamped 2025. Payment dates, the penalty mechanics and the withholding comparison are on the safe-harbour page and are not restated here. General information, not tax advice; the annualised method in particular is worth an accountant’s hour.
For the wider transition rather than the tax alone — the rate, the pipeline and the classification question — consulting after retirement.
One thing worth checking in the same session if you also hold a job: a state auto-IRA enrols you into a Roth by default, and married-filing-separately savers are phased out from the first dollar.
Filing a business schedule also changes what the return costs to prepare, and the IRS splits its own out-of-pocket estimate on exactly that line: see what tax preparation actually costs.