2026 Income Tax Rates — Understanding them to create wealth
The 'don't blame me' blurb: I am not a financial advisor, portfolio manager, or accountant. This is not tax or investment advice; it's information to get you going. Please consult your trusty professional and do your due diligence. Carry on!
Freelancers and Solopreneurs — Learn how to pay less tax, invest, and chill earlier in life.
TL;DR
Freelancers/self-employed: Understanding how you are taxed means keeping more of your income and creating future wealth.
Your income tax is like a layer cake. Each individual layer of taxable income is taxed at a higher rate as you earn more.
The critical thing most people get wrong is thinking that if you're "in the 32% bracket," everything you earn gets taxed at 32%. That's not how it works.
See how investing in the Solo 401(k) and the HSA cuts off the top of the cake, the highest taxed parts of your income, saving you a fortune.
Simple, consistent investing will build future wealth in the background.
How Personal Income Tax Rates Work — It's Not One Rate
I know, you’re busy just trying to make a living, paying that parking ticket, and dealing with that client that’s having a meltdown. But let’s have a quick chat about tax rates. Not sexy, but it’s important.
One of the biggest misunderstandings in personal finance: People think that once their income crosses into a higher tax bracket, all of their income gets taxed at that higher rate.
Nope. Not how it works.
This misunderstanding has cost people real money — and worse, it's scared them away from earning more.
The income tax system works like a layer cake. Each layer of income has its own tax rate. As your income goes up, only the dollars on that particular layer are taxed at that layer’s rate (more on that later). The dollars you earned below it? They stay right where they are, at the lower rates. Nobody moves.
| Tax Rate | Single Filers | Married Filing Jointly | Heads of Households |
|---|---|---|---|
| 10% | $0 to $12,400 | $0 to $24,800 | $0 to $17,700 |
| 12% | $12,401 to $50,400 | $24,801 to $100,800 | $17,701 to $67,450 |
| 22% | $50,401 to $105,700 | $100,801 to $211,400 | $67,451 to $105,700 |
| 24% | $105,701 to $201,775 | $211,401 to $403,550 | $105,701 to $201,775 |
| 32% | $201,776 to $256,225 | $403,551 to $512,450 | $201,776 to $256,200 |
| 35% | $256,226 to $640,600 | $512,451 to $768,700 | $256,201 to $640,600 |
| 37% | $640,601 or more | $768,701 or more | $640,601 or more |
| Source: IRS Rev. Proc. 2025-32 · FreelancerFinance.net | |||
Let’s take a step back and look at the earnings to tax flow.
The U.S. tax system is a complicated shitshow, especially for freelancers and the self-employed, so let’s quickly look at how we get to our taxable income. That is where the income tax brackets above take effect. The way it works and the tax forms used for Sole Proprietors and S-Corps are slightly different, but in the end, it’s similar.
Hover your cursor over the terms, or click on a phone to see the definition.
Freelancers with 1099 income
Gross Revenue > minus Business Expenses = Gross Income > minus Above-the-Line Adjustments = Adjusted Gross Income (AGI) > minus the Standard Deduction or Itemized Deduction = Taxable Income.
Freelancers who mostly earn W-2 income (like those in the film industry)
Gross wages (W-2) > minus Above-the-Line Adjustments = Adjusted Gross Income (AGI) > minus the Standard Deduction or Itemized Deduction = Taxable Income.
(Above the line for W-2 earners: IRA contributions, student loan interest, and HSA contributions. The Solo 401(k) is not an option for W-2 only income.)
Note: Consider becoming an S-Corp if you're earning more than $80,000–$100,000 in net profit (gross income) from 1099 revenue. It has significant benefits, primarily by reducing the amount of FICA. Talk to your accountant.
Uncle Sam gives us the bottom layer tax-free
As you have seen above, before the income tax rates above hit, we get to apply the Standard Deduction or Itemized Deduction.
The Standard Deduction: No receipts. No spreadsheet. No tears. The first portion of your income is reduced by a set amount and not taxed at all.
The amount depends on your filing status. After the deduction, the tax rates in the table above begin to apply.
| Filing Status | Deduction |
|---|---|
| Single | $16,100 |
| Married Filing Jointly | $32,200 |
| Head of Household | $24,150 |
| Source: IRS Rev. Proc. 2025-32 | |
Itemized Deduction: If you think itemizing will add up to more than the Standard Deduction, you itemize. This includes items such as mortgage interest, property taxes, donations, medical expenses (over a threshold amount), and others. These are NOT business expenses; they are calculated elsewhere. Stay with me.
The rule is simple: you pick whichever one is bigger. If your itemized deductions add up to more than the standard deduction, you itemize. If not, you take the standard deduction and save yourself the paperwork.
Single and earned $120,000? Let’s take a look.
Here is the ‘income cake’ and income tax rates on each layer if you are filing as single and earned $120k of Taxable Income.
Yes, this looks different compared to the tax rates table above, which starts at $0. That’s because the IRS is referring to your taxable income, which starts AFTER the Standard or Itemized Deduction.
Here are the layers:
The first $16,100 is free if you’re taking the Standard Deduction, then:
10% tax on the first $12,400 = $1,240
12% tax on the next $38,000 (from $12,401 to $50,400) = $4,560
22% tax on the remaining $53,500 (from $50,401 to $103,900) = $11,770
Total federal income tax: $17,570
On $120,000 of gross income, you're paying $17,570 in federal income tax.
Effective Tax Rate — the actual overall percentage you paid — is 14.6%.
Marginal Tax Rate — is the top tax rate you paid — is 22%. But that only hits the last chunk.
This is why earning more money never results in taking home less. You do not pay more tax on your entire income by earning more and moving up into another tax bracket. That myth needs to die. Making more money, means making more money!
You only pay the higher rate on the dollars that cross into the next bracket.
You’re a baller and earned $250,000
You're killing it, and your taxable income is $250,000. Compared to the person above, two more tax brackets come into play, 24% and the nasty 32% bracket. Notice the large jump there.
OK, now read on to see how we can remove the top of the income cake to avoid those higher tax rates.
Cut off the top of the cake — How contributing to your pre-tax Solo 401(k) and HSA lowers your taxes
This is where it gets good. When you contribute to a pre-tax Solo 401(k) or a HSA, you're cutting income straight off the top of the cake, the highest bracket. The most expensive layer — gone, or at least partially gone.
You may not have any spare cash now, but understanding how to take advantage of this in the future is a good idea.
Using our $120,000 example: Let's say you put $12,000 into your Solo 401(k):
You pulled $12,000 out of the 22% bracket ($12,000 × 22% = $2,640). That’s $2,640 of tax you pulled from the jaws of the IRS.
Better yet, that $12,000 you invested in your Solo 401(k) (or IRA + HSA for a freelancer W-2 earner) will grow at an average of around 7%. In 25 years, $12,000 growing at 7% becomes around $68,700. Do that every year for 25 years and you end up with $1.04 million.
Yep. Isn’t compound interest a shocker? Play around with the nifty compound interest calculator at the bottom of the page.
The $250,000 baller: This person can hopefully sock more away and should try to get out of higher tax brackets.
They contribute the $24,500 employee contribution for those under age 50.
They are an S-Corp and paid themselves a $120,000 W-2 salary. Their employer contribution in addition to the salary paid, is $120,000 x 25% = $30,000
Total Solo 401(k) contribution: $24,500 + $30,000 = $54,500
Taxable income before the Solo 401(k) $250,000 minus the $54,500 = $195,500
Remember, with the Solo 401(k), you are the employee and the employer.
$250k side by side, before and after the pre-tax Solo 401(k) contribution
Before Solo 401(k) contribution
After the $54,500 Solo 401(k) contribution
We chopped the top off the cake and got rid of the 32% bracket
Reduced income in the 24% bracket from $96,075 to $73,700
Total tax saved = $15,650
I’m assuming that if you’re earning $250k, you are a little older and closer to retirement (chilling!). Let’s say the $54,500 grows at 7% per year for 15 years (not 25 years). It becomes $155,000.
Now imagine how much tax you will save and how much money you will make in your Solo 401(k) doing that every year.
Hint: $250,000 starting balance + $54,500 for another 15 years growing at 7% = $2.15 million.
Tweak it in Jan - Feb
February comes around, and your accountant is giving you the side-eye after getting your numbers. This is where they can do the math for you, and if you’ve slipped up into a higher tax bracket, you can make a bigger company contribution to your Solo 401(k) and bring it back down.
Remember, your company Solo 401(k) contribution can be made up to your tax filing deadline in the new year.
What about state tax?
If your state has income tax, it could be a flat tax like Illinois and Colorado. States like California, New York, and D.C., where I am, use the same progressive layer-cake system as the Feds, but tax rates and brackets will differ by state.
In both cases, contributing to a Solo 401(k) will lower your state taxable income. PA and NJ have some weird rules re: retirement accounts, so watch out for them.
Don’t forget the HSA
The HSA also qualifies for a tax deduction and can further reduce your taxable income. Use it for medical expenses, or do what I do and use it as an investment account and let it grow. In 2026, you can contribute:
$4,400 for individuals
$8,750 for a family.
The money stays yours. It’s not use-it-or-lose-it like an FSA.
You must have a qualifying health insurance plan. Read about the HSA here.
“I will just buy more equipment for my business, so I pay less tax.” Maybe rethink that.
If you really NEED more equipment for your business to make more revenue, or you’re bringing an equipment purchase forward during a high-earning year, then sure.
Otherwise: Bury that idea for good, and don’t dig it back up.
Your goal as a business is simple: minimize expenses, maximize profit. Yes, you’ll pay tax on more profits, but it’s your money to keep. You can then (carefully) spend it on life, and/or invest it.
Where? A taxable brokerage account (you know, a standard share/ETF trading account), or real estate, to further grow your wealth. Fundrise is a great, easy option for truly passive real estate. (No, I don’t make any moolah from that link.)
Here is the thing: Taking those extra profits and then investing them means you pay only capital gains tax on the resulting investment income — 15% for most of us, plus the NIIT of 3.8% if you earn over $200k. Yes, a much lower tax rate than income taxes on labor.
Plus, it’s passive income. You don’t physically do anything, and the investments make money.
Why do you think rich people pay a lower overall tax rate than those of us earning a living from working? Their money comes from investing in assets, not from performing labor. In the United States, investment income is taxed at a lower rate than income from labor.
Warren Buffett told ABC News his secretary paid 35.8% while he paid 17.4%. The difference? His income came from investments, not labor. That's the game you're learning to play.
Do I think it’s fair that earnings from assets are taxed less than labor? No. Should we join them? Yes.
Your Solo 401(k) — the long game
Here's the long game:
By contributing to the Solo 401(k) and HSA, you cut the taxes you had to pay, and your contributions grow untouched by the taxman for decades. You will eventually pay income tax on withdrawals in retirement — but most people earn less in retirement than during their peak earning years. That means your withdrawals will fall into lower tax brackets, and you'll pay less overall.
The real power? Tax-free, compound growth. Your full contribution grows year after year without getting nibbled at by taxes along the way.
Yes, the IRS will eventually make you start withdrawing — that's RMDs — but by then you've had decades of tax-free growth.
Here's what that looks like (see the compound interest calculator below):
Read about the Solo 401(k) here. How to open it, and the simple investments to put inside it.
Sorry, IRS. Less for you, more for us.
Is there a Solo 401(k) Roth option?
There's also a Roth Solo 401(k) option — same account, but contributions go in after-tax and withdrawals in retirement are tax-free. Which to use depends on your current bracket vs. where you think you'll be in retirement. At age 52, I go 90% pre-tax, 10% Roth for flexibility.
Let’s wrap this up
Understandably, at the moment, you may not have much cash to spare. Bills, kids, and student loans all add up. Understanding how you are taxed, how to reduce your tax, plus the power of investing to create future wealth, will mean you’re ready to go when you can earn more.
Please forward this to your freelance and self-employed crowd. We need to help each other learn about money and investing.
Have a play around with the compound interest calculator below to see how your future wealth changes depending on how much you save and for how long you invest it.
Thoughts, ideas, questions? Comment below!
Compound Interest Calculator
Watch your money grow. Play with the numbers and see the magic of compound interest. We will get rich, slow.
Your Results
| Year | Contributed | Interest | Balance |
|---|
💡 Use 7-8% as a conservative estimate for a Three-Fund Portfolio. 10% is the long-term S&P 500 average before inflation. The real magic happens after year 15 when compound interest really kicks in. Start now — future you will be grateful.
