The Plain-English Guide to Self-Employment Tax

Self-employment tax is the Social Security and Medicare tax that self-employed people pay on their net business income. If you are a freelancer, sole proprietor, single-member LLC owner, or partner, this is the line item on your tax return that often surprises new business owners — and it shows up on top of regular federal income tax.

This is plain-English starter content, not tax advice. For your specific situation, talk to a CPA. For broader context, see our Learn hub and bookkeeping basics.

Why self-employment tax exists

When you work for someone else as a W-2 employee, your paycheck has Social Security tax (6.2%) and Medicare tax (1.45%) withheld, and your employer pays a matching 6.2% and 1.45% on top. Combined, that is the FICA tax that funds Social Security and Medicare.

When you work for yourself, you are both the employer and the employee. So you pay both halves yourself. That is self-employment tax, governed by the Self-Employment Contributions Act (SECA). The IRS Self-Employed Individuals Tax Center is the master reference.

How much is it?

The combined self-employment tax rate is 15.3% of net self-employment earnings:

• 12.4% Social Security on earnings up to a federal wage base limit (the limit changes every year — check the Social Security Administration)
• 2.9% Medicare on all earnings, with no cap
• An additional 0.9% Medicare surtax on earnings above $200,000 single / $250,000 married filing jointly

You only owe self-employment tax if your net self-employment income is $400 or more for the year.

What counts as self-employment income

• Freelance and consulting income
• Net profit from a sole proprietorship reported on Schedule C
• Most income from a single-member LLC (taxed as a sole prop by default)
• A general partner's share of partnership income
• Most ride-share, delivery, and gig platform income

W-2 wages, interest, dividends, rental income from personal real estate, and most capital gains are not self-employment income.

How the calculation actually works

For example, suppose your net profit on Schedule C is $50,000 for the year. Numbers shown are illustrative; actual rates and limits change yearly.

1. Multiply net profit by 92.35% to get net self-employment earnings: $50,000 × 0.9235 = $46,175. (The 92.35% step approximates the employer-half deduction that W-2 workers get implicitly.)
2. Multiply by 15.3%: $46,175 × 0.153 = roughly $7,065 of self-employment tax.
3. Deduct half of the self-employment tax ($3,532) above the line on your Form 1040 — this lowers your federal income tax even though it doesn't lower the SE tax itself.

You then also owe regular federal income tax on the remaining net profit, plus state income tax, plus any city tax. That is why self-employed people often owe much more than W-2 workers earning the same gross.

How and when to pay

Self-employment tax is paid through the quarterly estimated taxes system on Form 1040-ES. The IRS expects you to pay as you earn. Skipping or underpaying triggers an underpayment penalty.

The annual self-employment tax is calculated on Schedule SE of your Form 1040.

What you do get for the money

Paying self-employment tax earns you Social Security work credits toward future retirement, disability, and survivor benefits, just like W-2 work does. It also counts toward Medicare eligibility at age 65. Keep good records — your Social Security earnings statement at ssa.gov/myaccount shows what's been credited.

Ways to reduce self-employment tax legally

A few strategies are worth knowing about. Each has trade-offs and should be reviewed with a CPA.

• Deduct legitimate business expenses. SE tax is on net profit, so every legitimate deductible expense — home office, mileage, software, professional services — directly lowers SE tax. Our bookkeeping basics guide explains good record-keeping.
• Retirement plans. Contributions to a SEP IRA or Solo 401(k) lower your income tax (not SE tax), but they are still major small-business savings. See IRS Retirement Plans.
• Health insurance deduction. Self-employed people may deduct health insurance premiums for themselves and family above the line, lowering income tax (not SE tax).
• Elect S-corp taxation. Once net profit is high enough — often $40,000 to $80,000 and up — electing S-corp status lets you split income between a "reasonable salary" (subject to FICA) and distributions (not subject to SE tax). See our LLC vs. sole proprietor guide. This adds complexity, payroll, and a separate tax return.

Common self-employment tax mistakes

• Treating gross revenue as take-home. SE tax plus federal income tax plus state tax often takes 25% to 40% of net profit.
• Not paying quarterly. The IRS expects payments four times a year. Big April surprises are common otherwise.
• Missing the half-deduction. The above-the-line deduction for half of SE tax is one of the most-missed by self-filers.
• Forgetting Medicare surtax. Above the income thresholds, an extra 0.9% Medicare tax applies.

Where the money actually goes

Self-employment tax funds two huge federal programs:

• Social Security, which pays out retirement benefits starting between 62 and 70, plus disability and survivor benefits. Roughly 80% of the SE tax goes here.
• Medicare, which provides health insurance from age 65 (and earlier in some disability cases). Roughly 20% of the SE tax goes here, plus the additional 0.9% surtax on higher earners.

When you see the 15.3% number, remember it isn't a generic "tax." It is your contribution to those two specific programs. The benefits are real and tied to your contributions over your working life. The SSA self-employment publication explains the credit math.

A first-year planning example

Suppose you launch a freelance consulting business and project $60,000 in revenue, $10,000 in deductible expenses, and a $50,000 net profit. As a single filer with the standard deduction, your tax picture might look roughly like this in a typical recent year. Numbers are illustrative and change every year.

• Self-employment tax: $50,000 × 0.9235 × 0.153 ≈ $7,065
• Half-SE deduction: about $3,532 above the line
• Estimated taxable income after standard deduction: roughly $32,000–$33,000
• Federal income tax: several thousand dollars on top of SE tax
• State income tax: varies by state — zero in NOMAD-style states with no income tax, around 4% to 9% in most others

A reasonable safe-set-aside is 28% to 33% of every dollar of net profit, transferred to a separate tax savings account immediately and used to make quarterly estimated tax payments.

A note on the numbers

The Social Security wage base, surtax thresholds, and standard deduction change every year. Always check the latest with the IRS and the Social Security Administration. This is general info, not tax advice — talk to a CPA before relying on it for your situation.

Tax laws and SBA programs change every year — always check the latest at IRS.gov, SBA.gov, and your state's Secretary of State website.