Welcome to the third part of my going indie series! In the previous post, I discussed building a foundation, getting started, and finding clients. In this post, I am going to discuss many of the decidedly un-fun administrative aspects of being freelance and contracting like saving for retirement and — everyone’s favorite — taxes. Most folks consider these topics to be boring and tedious, but understanding them is critical to your success. The best approach is one of curiosity. As a software developer, you might find the task of optimizing (and minimizing!) your tax burden to be an interesting problem to solve — I definitely do!

In This Series

This post is part of a series about becoming an indie developer and freelancer.

  1. Going Independent
  2. Going Indie: building a foundation, finding clients, and negotiating rates
  3. Going indie: business structure, taxes, and retirement
  4. Going Indie: bookkeeping and invoicing

Disclaimer: I am not an accountant, nor a financial advisor. I highly recommend you get both! All the information in this post is derived from my experience, conversations with my accountant, and advice from my financial advisor. Of course, your tax situation and financial situation differ from mine, so “your mileage may vary” as they say. For example, I do not have children, but if you do that has a significant impact on your taxes and finances.

Also, as I noted in my first post, this series assumes you are based in the United States. While many aspects of this series are widely applicable, this post is very specific to the US.

What you may not realize is that going indie means starting your own business. Congratulations, you are now a small business owner as far as the IRS is concerned. Don’t worry, that does not mean some sort of formal business entity is necessary (as you will see below). It only means you need to shift your thinking a bit. My goal with this post is to give you a head start on learning how to structure your business, and what to expect regarding taxes. My hope is that you can begin your journey with more information than I had — which was literally zero.

If you do not have an accountant or financial advisor, I highly recommend you get both. Find someone you trust. Their expertise will help guide you in making the correct decisions for yourself and they will save you a ton of time and potential headaches. Likely, someone in your network can make a recommendation for both.

Business structure

The first task after deciding to go independent and do freelance/contract work is deciding how to structure your self-employed business. You have a few options, each with its own pros and cons. The factors that differ between the options primarily center around taxes, reporting, paperwork, and bookkeeping. There are many resources on the internet that explain the differences, benefits, and drawbacks of each self-employed business entity — so I will be brief. I am not an expert on these topics, so you should ultimately consult your accountant. My goal here is to make you aware of your options and give you the gist of each.

In all scenarios, you should open a new bank account for your business. It’s also a good idea to get a separate credit card that you use solely for business expenses. This is not strictly necessary as a sole proprietor (and the accounts can be normal accounts in your name, not actual business accounts), but it is a good practice to keep everything separate. This will make bookkeeping significantly easier for you.

  1. Sole Proprietorship. [IRS, Wiki] A Sole Proprietorship is owned and run by one person and in which there is no legal distinction between the owner and the business entity. Being a sole proprietor is the simplest and easiest structure. You do not need to establish a formal legal entity. There is no paperwork or setup. You operate as yourself, as an individual, under your legal name. Similar to being a full-time W-2 worker, you file taxes using your social security number (SSN), etc. You can (optionally) “level-up” by getting a Fictitious Business Name (FBN), which allows you to operate under a different “business” name. However, as the name indicates, this is not a “real” business entity. It merely provides a facade to your sole proprietorship, which can be useful in some situations. If you opt to have an FBN, then you also need to get an Employer Identification Number (EIN) to associate with it. An EIN is basically an “SSN for your business” — you file your taxes using the EIN instead of your SSN and you provide your EIN to your clients for your 1099 forms. In addition to income tax, you also pay self-employment tax. You “pay yourself” simply by withdrawing or transferring funds from your business account.

  2. S Corporation (S-Corp). [IRS, Wiki] An S-Corp is a more formal structure that requires you to establish a payroll system and pay yourself a salary. You need an EIN and there is various paperwork to complete to establish the S-Corp entity. The process can take a couple weeks or up to 3 months, depending on your circumstances. It differs in that you can have multiple shareholders. An S-Corp is similar to a sole proprietorship in that it is a “pass-through entity” meaning the corporation’s income and losses are divided among and passed through to its shareholders (i.e., you). In this scenario, you are the singular shareholder so you more or less file taxes like an individual would. However, S-Corps have access to additional deductions and can yield higher tax savings. Notably, an S-Corp is not a “full” corporation and alleviates you from double taxation where you would otherwise pay corporate tax as well as individual income tax. You still pay self-employment tax like a sole proprietor, and because you have to run a payroll system you also pay payroll taxes. You “pay yourself” via your payroll system. S-Corps also come with some additional fees and specific states impose their own taxes on S-Corps. Also note that some states tax S-Corps as C-Corps, negating the pass-through benefit. Because of the additional fees and taxes, it usually does not make financial sense to establish an S-Corp until your annual earnings pass a threshold of around $100,000 — at which point you are better positioned to reap the tax benefits. (Again, consult your accountant here.)

  3. Limited Liability Company (LLC). [IRS, Wiki] An LLC is what I know the least about. It is an established business entity that you also have to file paperwork to legally setup, pay fees, get an EIN, etc. An LLC does not need to have payroll. It is not a corporation but it is a legal form of a company. It is a hybrid business structure that can combine the pass-through taxation of a sole proprietorship with the limited liability of a corporation. Regulation of LLCs varies from state to state. LLCs generally have fewer formalities and reporting requirements than S-Corps, which can make them easier and less expensive to manage.

My advice is: do the simplest thing first. If you are just getting started, operate as a sole proprietor. You do not need to complete any legal paperwork and you can start working immediately. This is beneficial because if you decide that you do not like freelancing and contracting, then you can stop and go back to full-time work without having to do anything else. At the same time, if you do decide to stay independent, then it is easy to transition to an S-Corp or LLC later. I have a friend that established an LLC once for a project that eventually fizzled out, and he said the process to dissolve it was a nightmare. He wished he had just gone with a sole proprietorship first.

Finally, one important caveat is that sole proprietorships do not shield you from liability, whereas S-Corps and LLCs do. For example, say something terrible happens and a client files a lawsuit against you. With an S-Corp or an LLC, your personal assets are protected. That is, the client is suing the business entity and they can only go after the business entity’s assets. If you are a sole proprietor, then the client is suing you personally. Technically, that puts everything you own at risk of seizure and liquidation — bank accounts, investments, property. However — this is extremely unlikely and especially rare in our line of work. You are not going to get sued for a software bug. (I mean, maybe you could? But let’s be real.)

If you were starting a construction business or a restaurant, that is a very different story with very real scenarios involving liability. So do not allow the issue of liability scare you away from starting with a sole proprietorship! Tons of people are sole proprietors without any problems. It is important to weigh the potential risks of your type of business when choosing the appropriate structure. For software development and design, that risk is extremely low. Still, ask your accountant!


Taxes are terrible. Everyone knows this. And they are even worse when you are self-employed. However, you can mitigate your tax burden with deductions, which I’ll discuss below. Regardless of your business structure you will pay your normal income tax, which is the same as when you are a full-time worker at a company. The same federal and state income tax brackets apply.

What differs when you are self-employed is that you must also pay self-employment tax, or SECA (named after the Self-Employed Contributions Act). SECA taxes include Social Security and Medicare. When you are a full-time worker at a company, you also pay these taxes (called FICA, per the Federal Insurance Contributions Act) and you can see the deductions taken from your paychecks. So what’s the difference? When you work at a company, the company pays half of these taxes (FICA) and you pay the other half. When you are self-employed, you pay the full amount (SECA) — because you are the employee and the employer. The total self-employment tax is 15.3 percent. When you work at a company, you and the company each pay 7.65 percent.

There are a lot of details that go into these calculations that I will not cover in this post, but you are in luck — I made an app for that! Taxatio is tax calculator for freelancers that I released last year. It is available for iOS and macOS. It will help you with these calculations and tax estimations, as well as explain what’s going on with detailed breakdowns.

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I would be remiss if I did not take this opportunity to highlight the injustices of our tax system. SECA/FICA taxes are regressive taxes — the more money you make, the less you pay as a percentage of your total income. This imposes an undue burden on the poor and lower wage workers, not to mention the rich usually pay nothing. SECA/FICA are taxes on earned income, that is, income you earn through labor. Because the rich do not work, but rather “earn” money through their pre-existing assets and investments, they pay nothing into Social Security and Medicare. Furthermore, their wealth — that is, their property, investments, inheritance, and other assets — is taxed at significantly lower rates. Thus, the rich get richer simply because they own things all while doing no labor whatsoever, yet they still reap the benefits of our decaying social safety net that real workers provide.

The more you learn about our tax system, the more obvious it becomes that income taxes are designed to punish poor and working class people — and if you must work to pay your bills and survive, then you are working class. You may consider yourself middle class, but this is a facade propped up by our precarious and predatory credit system. Being “middle class” is a status that can be revoked at a moment’s notice, as we witnessed during the 2008 housing crisis. The middle class is an artificial bifurcation of working people manufactured by the rich via credit that deludes us into thinking there exists a ladder we can simply climb to join the wealthy elite at the top. It is a scam. No one earns a billion dollars — they steal it. (And before someone tries to lecture me about the “risk” of investments — there is no “risk” when you have a literal mountain of money and wealth at your disposal, not to mention a government that will bail you out after you make billions of dollars in derivatives evaporate overnight.)

SECA taxes have a significant impact on independent workers. It is wrong that you must pay double as a single person, as if you have the same influence and wealth as an entire corporation. Even full-time workers should not have to split the burden of FICA taxes with corporations reap millions in profits while suppressing wages and destroying our environment with impunity.

But, I digress.

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Estimated taxes

The most significant difference regarding taxes when you are self-employed and doing 1099 freelance/contract work is how and when you pay taxes. Your clients do not do any tax withholding. When you are a full-time W-2 worker, FICA taxes are withheld from each paycheck you receive. When you are self-employed, you must pay quarterly estimated taxes. This includes federal and state income tax (unless, of course, you live in a state that does not collect income tax). Instead of paying a small amount on each paycheck, you pay lump sum once per quarter.

Take note — quarterly estimated taxes are no joke. As an example, suppose your adjusted gross income for the year is $200,000. Your quarterly estimated tax payments may be as high as $18,000 per quarter. That’s a lot of money to drop at once. This means you need to be prepared. When clients pay you, do not withdraw the full amount from your business account to pay yourself. You always need to leave money in your business account for tax payments. Again, you are in luck because Taxatio will help you here by showing you the complete quarterly payments breakdown.

The hardest part about estimated taxes is… well, estimating them! When you first get started, this is a moving target. You are not sure how much you will make for the year. Do your best to make projections. Your accountant can help you here, too. After your first year of being independent is over, you can use the previous year’s income as your estimate for the next year. If you do not pay your quarterlies on time, in full, or at all, you will get hit with fees and penalties when you file your tax returns.

One reason I recommend going independent at the beginning of the calendar year is to simplify your taxes and estimates. If you start your freelance/contract work during the same year that you quit your full-time job, then you will have mixed income: some W-2, some 1099. This makes your estimations a bit more of a moving target, and they will not stabilize until after your second year — that is, your first full calendar year of being independent. However, you should not worry about this too much.

There is one nice thing about estimated taxes (and using Taxatio to plan). If you have accurate projections for your annual income, like me, that means you have an accurate understanding of your annual tax burden. This allows me to optimize my time and work. For example, once I have made enough money for the year and know I have enough to cover my taxes, I can stop working. Historically, this means I can not work for 2-3 months each year.

Conveniently, you can pay (and automatically schedule!) your federal estimated tax payments by creating an account with EFTPS.gov. For state estimated taxes, you will need to figure out the equivalent for your state. If you live in California, like me, then you can create an account with the California FTB where you can similarly schedule and pay your estimated payments.


Of course, we cannot discuss taxes without also discussing the available mechanisms we can employ to reduce them. In the example above, we discovered than an annual income of $200,000 could result in quarterly tax payments around $18,000. However, you can dramatically decrease this amount with deductions.

It is important to understand the difference between your gross income (the total amount of money you earn) and your taxable income (the portion of your income that is subject to income tax). Deductions are subtracted from your gross income, which results in reducing your taxable income. Some of the most common deductions include health insurance premiums and a home office. Consult your accountant for advice.

In part one I mentioned that you can purchase health insurance via the Affordable Care Act (ACA). Every state is different, but I have been happy with my experience in California. If you get health insurance (which, you probably should), the entirety of your premiums are tax deductible. Also note that failing to purchase insurance coverage will result in a tax penalty.

Another substantial deduction is self-employment tax (SECA). You are allowed to deduct half of SECA — that is, the “employer” portion. While I think paying double is an unnecessary burden on sole proprietors, it does help to be able to deduct this.

Finally, and most importantly, you should be keeping track of your expenses. Expenses are subtracted from your gross income, which again results in reducing your taxable income. I will discuss bookkeeping in detail in the next part of this series.

And, of course, Taxatio does these calculations and will show you a breakdown. The current version is limited with a single field for your total amount of deductions, but a future update will expand this functionality to allow a full itemized list.

Saving for retirement

The last significant piece of this puzzle involving business structure, taxes, and deductions is how you can continue to save for retirement despite no longer working full-time at a company. Typically, most companies provide retirement plans and many often offer matching contributions. Most commonly, you will have the opportunity to open a 401(k) plan. If you are lucky, the company will match a portion of your contributions.

In my experience, many folks are unaware that as a self-employed business owner you can open a Solo 401(k) plan. The rules are the same in terms of the maximum annual contribution amounts — except you are the employee and the company. This means you can contribute as an individual and then “match yourself” as the company. In 2023, the maximum individual contribution is $22,500. The maximum company contribution is $43,500 or 25% of your earned income — whichever is smaller. This means you can put up to $66,000 into your Solo 401(k) per year, assuming you make enough to maximize the company contribution. Yesthat is a sweet fucking deal. You might be missing out on stock options at a company, but you can dump a ton of savings into retirement.

With a 401(k), your contributions can be traditional (pre-tax) or Roth (after-tax). The difference is that traditional contributions reduce your taxable income, thus reducing the taxes you pay now. However, you will then pay taxes on the funds you withdraw during retirement. For Roth, you pay taxes now before making contributions and then when you withdraw funds during retirement, they are not taxed. The question to ask yourself is: do you want to pay taxes now, or later?

The other popular option is a Roth IRA. However, the maximum contribution for 2023 is only $6,500. You can have both a Solo 401(k) and an IRA, if you want. Be aware that there are many rules and regulations regarding contributions. I do not recommend trying to setup these accounts on your own. If you must choose one, a Solo 401(k) is often the better choice as it allows you to save significantly more. However, paperwork for an IRA can be much simpler, so that might be a good start depending on your circumstances.

For all of these important decisions, you should consult your financial advisor to make the choices that work best for you and your financial goals.

Finally, do I need to say it? Taxatio does these calculations for you. Currently, it only supports Solo 401(k) plans, but I would like to add support for Roth IRAs in a future update.


Today we covered some ugly, mundane — but nonetheless important — details of going independent. I hope this post was helpful if you are considering going independent. There is still more to come in this series. In the next part, I will discuss bookkeeping and invoicing! Stay tuned.

Update 17 August 2023

Many thanks to Michael Tsai and @ljmatkins for their feedback on this post regarding details about LLCs and retirement plans. I have updated this post to reflect their corrections and other notes.