Self-employment tax covers Social Security and Medicare when you're your own employer

When you work for yourself — whether as a freelancer, contractor, small business owner, or gig worker — you pay both the employee and employer portions of Social Security and Medicare taxes. A regular employee pays half; their employer pays the other half. You pay both. This combined amount is called self-employment tax.

The rate is 15.3 percent of your net self-employment income: 12.4 percent for Social Security (on income up to a cap that changes yearly) and 2.9 percent for Medicare (no cap). You calculate it on Schedule SE, a form you file with your tax return. The IRS does not bill you separately — you owe it when you file your 1040.

You do not pay self-employment tax on every dollar you earn. You subtract business expenses first, then apply the tax to what remains. If you had a loss, you owe nothing.

Key Takeaways

  • Self-employment tax is 15.3 percent of your net income after business expenses, split between Social Security (12.4 percent) and Medicare (2.9 percent).
  • You calculate it on Schedule SE and report it on your 1040 tax return; the IRS does not send a separate bill.
  • Social Security tax stops once you hit the annual income cap (which changes yearly), but Medicare tax continues on all income above that.
  • You can deduct half of what you owe as a business expense on your 1040, which lowers your overall tax bill.
  • Quarterly estimated tax payments are required if you expect to owe $1,000 or more for the year.

How to calculate what you owe

Start with your net self-employment income — the money left after you subtract all legitimate business expenses. This includes rent, supplies, equipment, mileage, meals, and anything else you spent to earn the income. You report this on Schedule C (or Schedule C-EZ if you use it).

Take that net number and multiply it by 92.35 percent. This adjustment accounts for the fact that you can deduct half your self-employment tax as a business expense. The result is your net earnings from self-employment.

Multiply that by 15.3 percent. That is your self-employment tax. However, the Social Security portion (12.4 percent) only applies to the first $168,600 of net earnings in 2024 — this cap increases yearly. Medicare (2.9 percent) has no cap and applies to all your net earnings. If you earn more than the Social Security cap, you still pay Medicare on the full amount.

Example: You had $50,000 in net self-employment income in 2024. Multiply by 92.35 percent = $46,175. Multiply by 15.3 percent = $7,065 in self-employment tax. Since $46,175 is below the Social Security cap, all of it is subject to both portions.

The income cap for Social Security tax

Social Security tax stops once your net self-employment income reaches the annual cap. In 2024, that cap is $168,600. In 2025, it is $176,100. The cap increases most years to account for wage growth. You can find the current year's cap on the IRS website or your tax software.

Medicare tax has no cap. You pay 2.9 percent on all your net self-employment income, no matter how high it goes. Additionally, if your total income (including wages from other jobs) exceeds $200,000 as a single filer or $250,000 as married filing jointly, you owe an extra 0.9 percent Medicare tax on the amount above that threshold.

This means high earners pay more. If you had $300,000 in net self-employment income in 2024, you would pay Social Security tax only on the first $168,600, but Medicare tax on all $300,000 plus the extra 0.9 percent on the amount over $200,000.

Quarterly estimated tax payments

If you expect to owe $1,000 or more in self-employment tax for the year, the IRS requires you to make quarterly estimated tax payments. These are due on April 15, June 15, September 15, and January 15 of the following year. You send them directly to the IRS using Form 1040-ES.

You do not have to guess. Form 1040-ES includes a worksheet to calculate what you owe based on your expected income for the year. If your income is uneven — high some months, low others — you can adjust your quarterly payments to match. Underpaying can result in penalties and interest, even if you owe nothing overall when you file.

Many self-employed people set aside 25 to 30 percent of their income to cover both self-employment tax and income tax. This is a rough estimate; your actual rate depends on your total income and filing status. A tax professional can give you a more precise number based on your situation.

The self-employment tax deduction

You can deduct half of your self-employment tax as a business expense on your 1040. This is a direct reduction in your taxable income, which lowers your overall tax bill. You do not have to itemize to claim it — it is a line on the 1040 itself.

Using the earlier example: if you owed $7,065 in self-employment tax, you can deduct $3,532.50. This reduces your taxable income by that amount, which saves you money on income tax. The deduction is already factored into the 92.35 percent calculation mentioned above, so you do not double-count it.

Who has to file Schedule SE

You file Schedule SE if you had net self-employment income of $400 or more during the year. This includes income from sole proprietorships, partnerships, S-corporations (if you took a distribution), and gig work. If you had less than $400 in net self-employment income, you do not have to file Schedule SE, but you may still owe income tax on that money.

If you are an employee and also have self-employment income, you file both a W-2 (from your employer) and Schedule SE. Your W-2 wages do not count toward the $400 threshold — only self-employment income does.

Church employees and certain other groups have different rules. If you are unsure whether you are self-employed for tax purposes, the IRS website has a worksheet to help you determine your status.

Frequently Asked Questions

Do I have to pay self-employment tax if I work as a contractor or freelancer?

Yes, if you had net self-employment income of $400 or more. Contractors and freelancers are self-employed, so you owe self-employment tax on your net earnings. Your client does not withhold it — you calculate and pay it yourself when you file your return or through quarterly estimated payments.

What if I have a loss instead of income?

You do not owe self-employment tax on a loss. If your business expenses exceeded your income, your net self-employment income is zero or negative, and you owe nothing. You can carry the loss forward to reduce taxes in future years.

Can I deduct business expenses before calculating self-employment tax?

Yes. Self-employment tax is calculated on net income after expenses, not gross income. Keep receipts and records for everything you spent to run your business — rent, supplies, equipment, mileage, meals, and professional services. The more you can document, the lower your net income and your self-employment tax.

What happens if I do not pay quarterly estimated taxes?

You may owe penalties and interest when you file your return, even if you pay the full amount owed. The IRS charges interest on late payments and a penalty for underpayment. Paying quarterly avoids these extra costs and spreads the burden across the year instead of one lump sum at tax time.

Does self-employment tax count toward Social Security benefits?

Yes. Self-employment tax funds your Social Security and Medicare accounts just like payroll taxes do. The more you pay in self-employment tax, the higher your future Social Security benefits will be, assuming you meet the work history requirements.