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 halves. This combined payment is called self-employment tax, and it's calculated on Schedule SE, a form you file with your federal tax return.
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 (on all net income). You can deduct half of what you pay as a business expense on your tax return, which reduces your overall tax burden slightly.
You owe self-employment tax if your net self-employment income is $400 or more in a year. If you earn less than that, you don't file Schedule SE, though you may still want to file a tax return to claim refundable credits.
Key Takeaways
- Self-employment tax is 15.3 percent of your net self-employment income, split between Social Security (12.4 percent) and Medicare (2.9 percent).
- You calculate net income by subtracting your business expenses from your gross income, then use that number on Schedule SE.
- The Social Security portion has an annual income cap (which varies by year); Medicare tax applies to all net income with no cap.
- You can deduct half of your self-employment tax payment as a business expense, which lowers your taxable income.
- Quarterly estimated tax payments help you avoid a large bill at tax time and may be required if you expect to owe $1,000 or more.
Step-by-step calculation using Schedule SE
Schedule SE is a two-page IRS form that walks you through the math. You start with your net profit from Schedule C (Profit or Loss from Business), which is your gross business income minus your business expenses. If you have multiple self-employment income sources, you add them together.
On Schedule SE, you multiply your 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 form does this math for you upfront. Then you apply the 15.3 percent rate to that adjusted figure. The result is your self-employment tax.
If your net self-employment income is under $400, you stop here and don't file Schedule SE. If it's $400 or more, you complete the form and transfer the amount to your Form 1040 (your main tax return). Half of what you paid goes on Schedule 1 as a deduction.
Income cap for Social Security, no cap for Medicare
Social Security tax only applies to income up to a certain limit, which the IRS adjusts each year. For 2024, that cap is $168,600. Once your net self-employment income reaches that amount, you stop paying the 12.4 percent Social Security portion. Medicare tax, however, has no cap — you pay 2.9 percent on every dollar of net self-employment income.
This means high-income self-employed workers pay less in total self-employment tax as a percentage of income than lower-income workers. If your income exceeds the Social Security cap, you only owe Medicare tax on the amount above it.
The income cap changes yearly, so check the IRS website or your tax software for the current year's limit before you file.
Quarterly estimated tax payments and when you need them
If you expect to owe $1,000 or more in self-employment tax and income tax combined, the IRS asks you to make quarterly estimated tax payments throughout the year. These are due on April 15, June 15, September 15, and January 15 (the dates shift slightly if they fall on a weekend or holiday).
You calculate estimated tax by adding your expected self-employment tax and income tax for the year, then dividing by four. Many self-employed people use their prior year's tax bill as a starting point, then adjust if they expect to earn more or less. You can pay online through the IRS website, by mail, or through your tax software.
Quarterly payments aren't required by law if you don't owe $1,000, but making them prevents a large surprise bill in April and can help you avoid underpayment penalties. If you miss a quarterly deadline, you can still file your full return and pay what you owe, though penalties may apply.
Deducting half your self-employment tax
Once you've calculated your self-employment tax on Schedule SE, you can deduct half of it as a business expense. This deduction lowers your adjusted gross income (AGI), which in turn lowers your overall income tax bill.
The deduction appears on Schedule 1 (Additional Income and Adjustments) if you file Form 1040, or on the equivalent line if you use a different form. You don't have to itemize deductions to claim it — it reduces your income before that calculation happens. This is one of the few tax breaks available to self-employed people, so make sure your tax software or preparer includes it.
Common mistakes to avoid
The most frequent error is forgetting to file Schedule SE at all. If your net self-employment income is $400 or more, you must file it even if you don't owe income tax. Not filing can result in penalties and interest, and it also means you're not getting credit for Social Security and Medicare contributions, which affects your future benefits.
Another mistake is using gross income instead of net income. You calculate self-employment tax on profit after expenses, not on revenue. If you earned $50,000 but spent $20,000 on business costs, your self-employment tax is based on $30,000, not $50,000.
A third common error is not making quarterly estimated payments when required, then facing a large bill and penalties in April. If you're new to self-employment, set aside 25 to 30 percent of your net income for taxes (both self-employment and income tax) each month to avoid this surprise.
Frequently Asked Questions
Do I have to file Schedule SE if I made less than $400?
No. If your net self-employment income is under $400, you don't file Schedule SE. However, you may still want to file a tax return if you had taxes withheld from other income or if you're owed a refundable credit like the Earned Income Tax Credit.
Can I deduct my business expenses before calculating self-employment tax?
Yes. Self-employment tax is calculated on your net profit (income minus expenses), not your gross income. Make sure you have receipts and records for all business expenses you claim, as the IRS may ask to see them.
What happens if I don't make quarterly estimated payments?
You can still file your tax return and pay what you owe in April without making quarterly payments. However, the IRS may charge an underpayment penalty if you owe $1,000 or more and didn't pay quarterly. The penalty is usually small, but it adds to your bill.
Does self-employment tax count toward my Social Security benefits?
Yes. Self-employment tax payments are credited to your Social Security and Medicare accounts just like payroll taxes from a regular job. These credits affect your future Social Security benefits and Medicare coverage.
What if I have both W-2 income and self-employment income?
You pay self-employment tax only on your net self-employment income. Your W-2 wages are subject to regular payroll taxes instead. If your combined income is high, you may hit the Social Security wage cap through your W-2 job, which can reduce the self-employment tax you owe on your side business.