The number on your invoice is not your wage. Out of every dollar you bill, a third is yours to keep only after the costs your employer used to carry, the days you cannot bill, the overhead and both halves of the payroll tax have come out. That is not a reason to stay on the payroll. It is the reason to price properly, and the reason a "$1,000 week" feels like a $500 one in year one. Here is where each dollar goes, with the arithmetic this site already publishes and nothing invented.
Why a bigger number is not a raise
The clearest way to see it is the worked example from How to price your work so you actually make money, which builds a billing rate up from a $33-an-hour employee wage one step at a time:
| Step | Per hour | What it is |
|---|---|---|
| Employee wage | $33 | What landed in your pocket per hour worked |
| Plus the employer's share | $41 | Payroll taxes, workers' comp, the half your boss paid |
| Spread over billable hours only | $57 | You are paid for 187 days, not 261, so the same money has fewer hours to come out of |
| Plus overhead | $80 | Truck, fuel, tools, insurance, phone, software, licensing |
| Plus 15% profit | $94 | Profit is the business's, not your wage |
$33 to $94 is 2.8 times, and not one line of it is greed. Turn it around and it tells you where a billed dollar goes. Of every $1,000 you bill at a rate built like that, roughly $350 is the wage you would have earned as an employee, $90 replaces what an employer paid in payroll tax and comp, $170 covers the days you cannot bill, $240 is overhead, and $150 is profit. Then the wage and the profit get taxed.
So a tradesperson who bills $45 an hour after leaving a $33 job has taken a pay cut and does not know it yet. The tool that back-solves this for your own costs is What Should I Actually Charge?, and the list of everything that belongs in the number is the Pricing a Job: Cost Checklist.
The tax that surprises everyone
When you had an employer, they paid half of your Social Security and Medicare and you never saw it. On your own you pay both halves: self-employment tax of 15.3 percent (12.4 percent Social Security on the first $184,500 of earnings in 2026, plus 2.9 percent Medicare with no cap), charged on 92.35 percent of your net profit and worked out on Schedule SE. You deduct half of it before your income tax is figured, and that income tax then sits on top at the same brackets everyone pays.
The good news is the Qualified Business Income deduction: the trades qualify, and it takes 20 percent off your business profit before income tax is calculated. It was made permanent in 2025. Details in What is the QBI deduction and do I get it?
The worked example in How much should I set aside for taxes when I'm self-employed? puts numbers on it. Clear $80,000 in profit as a single filer in a state with no income tax and you owe about $11,304 in self-employment tax plus roughly $5,344 in federal income tax after the standard deduction and QBI. Call it a fifth of your profit, in the kindest state. Add state income tax where there is one. That is why the rule of thumb is to set aside 25 to 30 percent of every payment you take in as profit, closer to 25 in the nine states with no income tax and closer to 30 everywhere else. The Tax Set-Aside Calculator runs it for your state.
And you pay it four times a year, not once. For 2026 the estimated-tax dates are April 15, June 15, September 15 and January 15, 2027, through IRS Direct Pay or EFTPS. The safe harbor that makes you penalty-proof is paying at least 100 percent of last year's total tax in four equal installments (110 percent if last year's adjusted gross income was over $150,000). In your first year there is no last year, so estimate from actual profit as you go. Move the set-aside into a separate account the day each payment lands, because tax money that sits in your spending account quietly disappears before April. When do I pay my taxes if I'm self-employed? and What's Due This Month keep the dates in front of you.
The costs that did not feel like costs when you set your rate
None of these are individually frightening. Together they are the gap between the rate and the wage.
Unpaid time. Quoting, site visits that do not turn into work, supply runs, paperwork, chasing money, the punch list. The pricing guide's 187 billable days out of 261 working days is the honest allowance, and if you priced as though you bill every day you work, you cut your own rate by more than a quarter before you started.
No paid time off. A week not working is a week with no income while your bills carry on. That is not a reason to stay employed; it is a reason to price knowing you will not bill fifty-two weeks. Going from employee to running your own show is the full list of what your boss was quietly handling.
The truck. Fuel, tires, service, the surprise repair, and the fact that a personal auto policy excludes business use, so a crash while hauling materials can be denied outright (Do I need commercial auto insurance for my work truck?). You deduct it through the standard mileage rate (72.5 cents a mile to June 30, 2026 and 76 cents from July 1) or actual costs, never the loan payment itself. A truck over 6,000 pounds GVWR can be written off far faster than a car; a $60,000 sedan takes five years to deduct and a heavy pickup can go in year one. Claiming 100 percent business use is almost always challenged, so keep a mileage log written at the time. How do I write off my truck and equipment? and the Mileage Deduction Calculator cover it.
Tools. Every cordless kit, every replacement, every bigger purchase. Tools are deductible in full the year you buy them, which helps. What does not help is that general liability does not cover them at all, under 7 percent of stolen hand tools are ever recovered, and a tools floater only pays for theft from a vehicle if it was locked with evidence of forced entry. Tools and equipment insurance (inland marine) and Stop your tools getting stolen are the two guides, and the Equipment Register is where the serial numbers live before anything goes missing.
Insurance. General liability on an occurrence form, commonly a $1,000,000 per occurrence and $2,000,000 aggregate policy, because most contracts and many licenses demand it. Commercial auto. The tools floater. Workers' comp is usually not required until you hire someone, but note the flip side: in most states an owner is exempt from comp on themselves, which means if you get hurt there are no comp benefits for you, so your own health and disability cover fills that gap. Premiums are driven by trade, payroll, location and claims history, so nobody can quote you a national figure. What insurance do I actually need as a contractor? is the map.
Marketing and lead fees. Free if you build it on a Google Business Profile, reviews and referrals. $150 to $1,000 per won job if you buy it, on the arithmetic in What paid lead platforms actually cost you.
Bookkeeping, software and a CPA. A free tool like Wave and a separate business account are genuinely enough while you are solo and simple; QuickBooks earns its cost once you need real job costing. A CPA earns theirs when you hire, consider an S-corp, or carry long jobs across year-end. Running an S-corp costs roughly $1,400 to $3,800 a year in payroll and returns, which is why it only pays past about $70,000 to $80,000 of steady profit. Accounting software for a small contractor, When to hire a bookkeeper or a CPA and Sole prop, LLC, or S-corp are the three decisions.
Health insurance. There is no employer plan now. You buy on the ACA Marketplace, usually with subsidies based on income, and your premiums are deductible straight off your income as long as you were not eligible for a subsidized employer plan. How US health insurance works when there's no NHS was written for arrivals and applies word for word to anyone leaving a payroll.
Retirement. Nobody is matching anything. The three tools built for you are the SEP-IRA (up to 25 percent of net earnings, capped at $72,000 in 2026), the Solo 401(k) (a $24,500 deferral plus an employer share, up to $72,000 total) and the Roth IRA ($7,500 under 50). A self-employed electrician netting $80,000 could shelter around $38,300 in a Solo 401(k). And every year you report income you earn Social Security credits, one per $1,890 of earnings in 2026, four a year, forty needed to qualify at all; cash work reported nowhere earns none. Retirement when nobody's building you a pension is the one guide in this section to read before you feel ready for it.
A year, in the order the money leaves
There is no national take-home figure for a first-year contractor, and anyone quoting one is guessing. What there is, is an order of operations, and it runs the same for everyone:
- Gross billings. Everything customers paid you.
- Minus materials and subs. Money that passed through you. Deductible, so it is not taxed as your income, and in most states the sales tax you paid at the supply house rides along in that cost rather than appearing on the customer's invoice (Do I charge my customer sales tax on a construction job?).
- Minus overhead. Truck, insurance, tools, phone, software, licensing, marketing, the CPA. Everything in What can I write off as a self-employed contractor?, and only that; the Can I Claim This Expense? tool settles the arguments.
- What is left is your profit on Schedule C. Both your "wage" and the business's profit live here; the IRS does not split them for a sole proprietor.
- Minus 25 to 30 percent for tax, paid quarterly.
- Minus health insurance and retirement, which you now fund yourself.
- Spendable income.
Run the $80,000 example through steps 5 to 7 and about $63,000 is left before health cover and retirement. Whether $80,000 of profit is what a first year produces depends on your trade, your area, your pricing and how many of the 261 days you actually billed, and this guide will not pretend to know.
Years one to three, honestly
Year one is the expensive one: buying gear, learning to price, fewer billable days than you planned, no prior-year tax to safe-harbor against, and the mistakes everyone makes once. The multiple above is the fact to hold on to. If your rate was built from your costs, a thin year is a thin year, not a losing one.
Year two is when the free assets start paying: reviews compound, referrals arrive pre-trusted, and you know which jobs made money because you costed them afterward. It is also when to raise prices, because you now have a track record to raise them from.
Year three is where the structure questions come due. If profit is steadily past $70,000 to $80,000 the S-corp election starts to pay, and after 12 to 18 months of on-time supplier accounts a community bank will look at a line of credit, which is the tool that smooths the gap between paying for a job and collecting on it (Business banking and building business credit).
Cash is not profit
The last thing that shrinks your take-home is timing. You pay for materials and labor at the start of a job and collect at the end, or 30 to 60 days after invoicing, so a profitable year can still have months where the account is empty. Take a deposit within your state's cap, bill in stages against milestones, never let 60 days of work pile up unbilled, and keep at least three months of overhead in reserve, built before you leave the payroll if you can. Deposits and progress billing and Managing cash flow in a feast-or-famine trade are the two guides; the Monthly Profit Tracker tells you each month whether you actually made money or were just busy.
If the numbers have already gone wrong, I owe the IRS and can't pay is the practical route (file anyway, on time, because not filing costs ten times what not paying does), and Money worries and your mental health is there for the part that is not about the money.
Where to go next in this section
- Your first quote: how not to undersell yourself on day one (15.9), the rate above turned into a number on a page.
- Setting up properly before the first job (15.7), the account, the set-aside and the insurance in the right order.
- W-2 employee vs on your own: a year-by-year comparison (15.8), for what the payroll was quietly paying you.
- Your first year on your own: what actually happens (15.4).
- The slow season: what to do when the phone stops (15.10), which is the month the buffer is for.
- The Year-End Tax Prep Checklist and the Cash Flow Emergency Plan, one for December and one you hope never to open.
Common questions
Will I make more money on my own than as a W-2 employee?
You can, but not automatically, and not just because your billing rate is higher than your old wage. Out of what you bill you now pay the employer's half of payroll tax, the days you cannot bill, the truck, tools, insurance, marketing and your own time off, all of which your employer carried. The site's worked example shows a $33-an-hour employee needs to bill about $94 an hour to end up in the same place. Price from your costs and the upside is real; price off your old wage and you will be busier and poorer.
How much of what I bill is actually mine to keep?
On a rate built properly, roughly a third is the wage you would have earned as an employee and about 15 percent is profit, with the rest replacing employer costs, covering unbillable days and paying overhead. Then the wage and the profit are taxed, so set aside 25 to 30 percent of profit. Materials and subs are pass-through: deductible, not income. The exact split depends on your overhead and how many days you bill, which is why you build your own number rather than borrowing anyone else's.
How much should I set aside for taxes when self-employed?
About 25 to 30 percent of every payment you take in as profit, not of the whole invoice. That covers self-employment tax of 15.3 percent on 92.35 percent of net profit plus federal income tax with a little room. Sit closer to 25 percent in one of the nine states with no income tax and closer to 30 percent everywhere else, and pay it in four installments on the 1040-ES dates. Move it to a separate account the day each payment lands.
Do I pay tax on the materials money that passes through me?
No, as long as you deduct it. Materials and subcontractors you paid are business expenses, so they come off your gross billings before profit is figured, and only the profit is taxed. The sales tax you paid on materials at the supply house is part of the material cost and is deductible with it. What you must not do is spend the materials money as though it were yours; it is the customer's job passing through your account.
Why am I broke if my jobs are profitable?
Because profit and cash are not the same thing, and construction times them badly. You spend on materials and labor at the start of a job and collect at the end or 30 to 60 days after invoicing, so a profitable business can be short of cash at any given moment. The fixes are a deposit before you buy materials, billing in stages against milestones, invoicing the day each stage is done, and a reserve of about three months of overhead.
The honest bit
- The 15.3 percent self-employment tax, the $184,500 Social Security wage base, the 2026 estimated-tax dates, the mileage rates and the retirement limits are 2026 federal figures. Verify at irs.gov.
- The $33 to $94 stack and the $80,000 example are this site's worked examples with their assumptions stated. They show how the arithmetic works. They are not benchmarks for your trade or your area.
- There is no national earnings figure for years one, two or three in this guide, because none exists that would survive contact with your own costs.
- State income tax sits on top of everything here. Check Working in Your State.
- This is general guidance, not tax or financial advice.
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