Self-employment tax is 15.3% of your net profit, split into two parts: 12.4% for Social Security and 2.9% for Medicare

If you work for yourself — whether you run a business, freelance, or drive for a rideshare company — you pay both the employer and employee portions of Social Security and Medicare taxes. An employee pays half (7.65%), and their employer pays the other half. When you're self-employed, you pay both halves yourself. That combined 15.3% is called self-employment tax, and you calculate it on your net profit, not your gross income.

The Social Security portion (12.4%) only applies to the first $168,600 of net profit in 2024 — that threshold changes each year. Medicare (2.9%) applies to all your net profit with no cap. If your net profit exceeds $200,000 (or $250,000 if married filing jointly), you also pay an additional 0.9% Medicare tax on the amount above that threshold.

Key Takeaways

  • Self-employment tax is 15.3% of your net profit, calculated after you subtract business expenses from gross income.
  • You can deduct half of your self-employment tax from your income when you file your tax return, which reduces your overall tax bill.
  • You must file Schedule SE (Form 1040) to calculate self-employment tax, even if you owe no income tax.
  • Quarterly estimated tax payments are required if you expect to owe $1,000 or more in self-employment tax for the year.
  • Net profit under $400 does not require you to pay self-employment tax or file Schedule SE.

How net profit is calculated for self-employment tax

Self-employment tax is based on net profit, not the total money you bring in. Net profit is your gross income minus business expenses. If you earned $50,000 from freelance work but spent $15,000 on equipment, software, and supplies, your net profit is $35,000. Self-employment tax is calculated on that $35,000.

Common deductible business expenses include office supplies, equipment, vehicle mileage, home office rent or depreciation, professional services (accounting, legal), insurance, and advertising. You do not need to itemize these on your tax return — you can use the simplified home office deduction if you may have access to. Keep receipts and records for everything you deduct, because the IRS may ask to see them.

If your net profit is less than $400 for the year, you do not owe self-employment tax and do not have to file Schedule SE. However, if you have other income or circumstances that require you to file a return anyway, you may still want to report the loss or low profit to establish a record with Social Security.

The math: calculating what you owe

The calculation has two steps. First, multiply your net profit by 92.35% — this accounts for the fact that you can deduct half of your self-employment tax. Then multiply that result by 15.3%.

Example: You have $40,000 in net profit. Multiply $40,000 × 0.9235 = $36,940. Then multiply $36,940 × 0.153 = $5,652.82. That is your self-employment tax for the year.

You report this on Schedule SE (Form 1040), which is a worksheet you file with your federal tax return. The IRS provides the form and detailed instructions on its website. Tax software will calculate this for you if you enter your net profit correctly. If you do the math by hand, double-check your numbers — errors here can trigger an audit.

The deduction that lowers your tax bill

After you calculate your self-employment tax, you can deduct half of it from your income. In the example above, you would deduct $5,652.82 ÷ 2 = $2,826.41 from your taxable income. This deduction appears on Form 1040 and reduces the amount of income tax you owe, even though it does not reduce the self-employment tax itself.

This deduction is automatic — you do not have to choose it or do anything special. It appears on your tax return as a line item. The deduction recognizes that the employer portion of the tax is a business expense, not personal income.

Quarterly estimated tax payments

If you expect to owe $1,000 or more in self-employment tax and income tax combined for the year, you must make quarterly estimated tax payments. These are due on April 15, June 15, September 15, and January 15 of the following year. You pay the IRS directly using Form 1040-ES, which includes a worksheet to calculate what you owe each quarter.

Quarterly payments prevent a large bill when you file your return and help you avoid penalties for underpayment. If your income is uneven throughout the year, you can pay more in quarters when you earn more and less in slower quarters — the IRS only cares about the total paid by year-end.

If you miss a quarterly deadline, you can still pay when you file your return, but you may owe a penalty and interest. The penalty is usually small if you pay the full amount by the filing deadline.

Self-employment tax and Social Security benefits

Self-employment tax funds your Social Security and Medicare accounts, just like payroll taxes do for employees. The more you pay in self-employment tax, the higher your future Social Security benefit will be. Each year of self-employment income counts toward your work history, which the Social Security Administration uses to calculate your benefit amount at retirement.

If you have both self-employment income and W-2 wages in the same year, Social Security taxes stop once your combined income reaches the annual threshold ($168,600 in 2024). You do not pay Social Security tax twice on the same dollar. However, Medicare tax continues on all income with no cap.

Frequently Asked Questions

Do I have to pay self-employment tax if I have a loss?

No. Self-employment tax is only owed on net profit. If your business expenses exceed your income, you have a loss and owe no self-employment tax. You can carry the loss forward to future years to offset future profits. File your return anyway to document the loss with the IRS.

Can I reduce my self-employment tax by incorporating?

Not significantly. If you form an S-corporation, you can pay yourself a reasonable salary (which is subject to payroll taxes) and take the rest as a distribution (which is not). This can save you self-employment tax on the distribution portion, but the IRS watches for people who set unreasonably low salaries. Consult a tax professional before incorporating solely for this reason.

What if I have self-employment income and a W-2 job?

You pay self-employment tax on your net self-employment profit and payroll taxes on your W-2 wages separately. Social Security tax stops once your combined income reaches the annual threshold, but Medicare tax continues on all income. Report both on your tax return — the IRS will credit the payroll taxes withheld from your W-2 against your total tax bill.

Do I need to file a tax return if I only have self-employment income under $400?

No self-employment tax is owed, but you may still need to file if your gross income exceeds other thresholds set by the IRS (which vary by age and filing status). Check the IRS website or use their interactive tool to determine whether you must file. Filing is never harmful and can help you claim refundable credits.