Self-employment tax covers Social Security and Medicare when you work for yourself

Self-employment tax is what you pay toward Social Security and Medicare when you are your own boss. If you work as a freelancer, run a business, or have side income, you owe this tax in addition to regular income tax. The IRS calls it self-employment tax, and you calculate it on Schedule SE, a form you file with your tax return.

The rate is fixed: 15.3 percent of your net earnings. That breaks down to 12.4 percent for Social Security and 2.9 percent for Medicare. However, you only pay the Social Security portion (12.4 percent) on earnings up to a cap — that cap changes each year. In 2024, the cap was $168,600. Any earnings above that cap skip the Social Security portion but still owe the Medicare portion.

The math is straightforward once you know your net profit. Net profit means what you made minus what you spent running the business. You do not pay self-employment tax on gross revenue.

Key Takeaways

  • Self-employment tax is 15.3 percent of your net business profit, split between Social Security (12.4 percent) and Medicare (2.9 percent).
  • You calculate net profit by subtracting legitimate business expenses from the money you brought in.
  • Social Security tax only applies to earnings below an annual cap, which was $168,600 in 2024 and increases each year.
  • You report self-employment tax on Schedule SE and pay it when you file your tax return or through quarterly estimated tax payments.
  • You can deduct half of what you pay in self-employment tax from your income tax, which lowers your overall tax bill.

How to calculate net profit from your business

Start with the total money your business brought in during the year. This is your gross revenue — every dollar from clients, customers, or sales. Then subtract every legitimate business expense you paid out of pocket.

Legitimate expenses include rent for office space, equipment you bought for work, software subscriptions, supplies, vehicle mileage if you use your car for business, insurance, and wages you paid to employees. If you work from home, you can deduct a portion of your rent or mortgage, utilities, and internet based on the square footage of your workspace. Keep receipts and records for everything you deduct.

The number you end up with — revenue minus expenses — is your net profit. This is the number you use to calculate self-employment tax. If your business lost money that year, your self-employment tax is zero.

The step-by-step calculation

Once you have your net profit, the calculation has three steps.

Step 1: Multiply net profit by 92.35 percent. This accounts for the fact that you can deduct half of your self-employment tax as a business expense. The IRS builds this into the calculation so you do not have to do it twice. If your net profit is $50,000, you multiply $50,000 by 0.9235 to get $46,175.

Step 2: Multiply that result by 15.3 percent. Using the example above, $46,175 times 0.153 equals $7,065. This is your total self-employment tax before the Social Security cap applies.

Step 3: Check the Social Security cap. If your net profit is below $168,600 (in 2024), you are done — $7,065 is what you owe. If your net profit is above the cap, you recalculate the Social Security portion only on earnings up to the cap, then add the full Medicare portion on all earnings. This is where Schedule SE does the heavy lifting for you, because the form walks you through the cap automatically.

Most people file Schedule SE with tax software or a tax preparer, who handles these calculations. But understanding the steps helps you know what is happening to your money.

When you pay self-employment tax

You have two options: pay it all when you file your annual tax return, or pay it in four quarterly installments throughout the year.

If you expect to owe $1,000 or more in self-employment tax, the IRS prefers that you pay quarterly. Quarterly estimated tax payments are due on April 15, June 15, September 15, and January 15 of the following year. You calculate one-quarter of your expected annual self-employment tax and send it in each time. If you do not pay quarterly and owe a large amount at tax time, you may face a penalty for underpayment.

If you expect to owe less than $1,000, you can wait and pay the full amount when you file your return. Many people with side income or part-time freelance work fall into this category.

The self-employment tax deduction

Here is a break that makes self-employment tax less painful: you can deduct half of what you pay from your income tax. This is called the self-employed tax deduction, and it appears on your Form 1040.

Using the earlier example, if you paid $7,065 in self-employment tax, you can deduct $3,532.50 from your taxable income. This lowers the income tax you owe. The deduction is automatic — you do not have to choose it — and it is built into the 92.35 percent calculation in Step 1 above.

This deduction is one reason self-employment tax is not quite as heavy as it looks. You are paying 15.3 percent, but the deduction reduces your income tax on top of that, so your real cost is somewhat lower.

Self-employment tax when you have a day job

If you work for an employer and also have self-employment income, you owe self-employment tax on the self-employment income only. Your employer handles Social Security and Medicare withholding on your W-2 wages separately.

However, the Social Security cap applies to your combined earnings. If you earned $140,000 as an employee and $40,000 as self-employed, your total is $180,000. The Social Security portion of self-employment tax only applies to the first $168,600 of your combined earnings (in 2024). Your employer already withheld Social Security tax on their portion, so you calculate self-employment tax on the self-employment income only, but you stop the Social Security portion once your combined earnings hit the cap.

This is another place where Schedule SE and tax software are worth their weight — they track the cap across all your income sources and make sure you do not overpay.

Frequently Asked Questions

Do I owe self-employment tax if I made less than $400?

No. The IRS does not require you to pay self-employment tax on net earnings below $400 in a year. If you made $300 in freelance income after expenses, you owe nothing. However, you may still want to file a return to claim other deductions or credits.

What counts as a business expense I can deduct?

Any cost directly tied to earning your income counts: supplies, equipment, software, professional services, rent for workspace, vehicle mileage, insurance, and wages to employees. Personal expenses like groceries or your car payment do not count. Keep receipts and track mileage carefully — the IRS asks for proof if you are audited.

Can I reduce my self-employment tax by forming an LLC or S-corp?

Forming a business structure does not automatically lower self-employment tax. An LLC taxed as a sole proprietorship owes the same tax as a freelancer. An S-corp can reduce self-employment tax, but only if you pay yourself a reasonable salary as an employee and take the rest as distributions — this requires payroll setup and more paperwork. Talk to a tax professional to see if it makes sense for your income level.

What if I underpaid my quarterly estimated taxes?

You can still file your return and pay the full amount owed. The IRS may charge a penalty for underpayment, but the penalty is usually small if you paid most of what you owed. Adjust your next year's quarterly payments based on what you actually earned this year to avoid the same problem.

Do I have to file a tax return if I only have self-employment income?

If your net self-employment income is $400 or more, yes — you must file. Even if you owe no income tax, you file to report self-employment tax. If you earned less than $400 after expenses, filing is optional, though you may want to file anyway to claim refundable credits.