Self-employment tax is the Social Security and Medicare tax you pay when you work for yourself

When you are employed by a company, your employer withholds Social Security and Medicare taxes from your paycheck and pays half the cost themselves. When you are self-employed — whether you run a business, freelance, or work as an independent contractor — you pay both halves yourself. This combined payment is called self-employment tax.

Self-employment tax is separate from income tax. You owe it on top of regular federal and state income taxes. The IRS requires you to calculate and pay it yourself, usually through quarterly estimated tax payments, rather than having an employer handle it.

The rate is 15.3 percent of your net earnings: 12.4 percent for Social Security (up to an annual earnings cap) and 2.9 percent for Medicare (no cap). You can deduct half of what you pay as a business expense on your tax return, which lowers your overall tax burden slightly.

Key Takeaways

  • Self-employment tax covers Social Security and Medicare and applies to anyone earning $400 or more from self-employment in a year.
  • The rate is 15.3 percent of net self-employment income, calculated after you subtract business expenses.
  • You typically pay self-employment tax through four quarterly estimated payments rather than in one lump sum at tax time.
  • You report self-employment income and tax on Schedule C and Schedule SE, which you file with your regular tax return.
  • Keeping records of income and expenses throughout the year makes calculating self-employment tax much simpler at tax time.

Who has to pay self-employment tax

You owe self-employment tax if you had net earnings of $400 or more from self-employment during the year. This includes income from a sole proprietorship, partnership, S corporation, or work as an independent contractor or freelancer.

The $400 threshold is the net amount — what you earn after subtracting business expenses. If you gross $500 but spend $150 on supplies, your net is $350, and you would not owe self-employment tax that year. If you net $400 exactly, you owe it.

Certain types of income do not count toward self-employment tax: rental income from real estate, investment income, capital gains, or income from a C corporation where you are a shareholder but not an employee. If you are an employee of a company and also do freelance work on the side, you owe self-employment tax only on the freelance earnings.

How to calculate your self-employment tax

Start with your net self-employment income — the amount you earned minus business expenses. You report this on Schedule C (Profit or Loss from Business), which is part of your tax return.

From that net income, you calculate your self-employment tax using Schedule SE (Self-Employment Tax). The calculation has two parts. First, multiply your net self-employment income by 92.35 percent (this accounts for the employer-side deduction). Then apply the 15.3 percent rate to that figure.

The Social Security portion (12.4 percent) applies only to earnings up to an annual cap, which changes each year. For 2024, the cap is $168,600 in net self-employment income. Medicare tax (2.9 percent) has no cap and applies to all net earnings. If you earn more than the cap, you pay the full Social Security tax on the first portion and then only Medicare tax on the remainder.

Many people use tax software or work with a tax professional to complete Schedule SE, since the calculation involves multiple steps and the earnings cap changes annually.

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 to the IRS. These are due on April 15, June 15, September 15, and January 15 of the following year.

To calculate each quarterly payment, estimate your total income and expenses for the year, then divide your expected tax bill by four. If your income varies throughout the year, you can adjust each quarter's payment based on what you actually earned in that quarter.

Paying quarterly keeps you from owing a large lump sum at tax time and helps you avoid penalties and interest charges. If you do not pay enough in quarterly payments, the IRS charges interest on the shortfall, even if you ultimately owe no additional tax.

You can pay estimated taxes online through the IRS website, by mail, or through an electronic payment system. The IRS provides a worksheet and payment vouchers to help you track what you owe.

Deducting business expenses to lower your tax

Self-employment tax is calculated on your net income, not your gross income. This means deducting legitimate business expenses directly reduces the amount of self-employment tax you owe, not just income tax.

Common deductible expenses include supplies, equipment, home office costs, vehicle mileage, professional services, insurance, and education related to your business. You must keep receipts and records to support these deductions if the IRS ever asks.

The more carefully you track expenses throughout the year, the lower your net self-employment income will be, and the less self-employment tax you will owe. Many self-employed people use accounting software or spreadsheets to log expenses as they happen, rather than trying to reconstruct them at tax time.

How self-employment tax affects Social Security and Medicare

Self-employment tax funds the same Social Security and Medicare programs that employee payroll taxes fund. The Social Security portion of your self-employment tax builds your Social Security record and determines your future retirement benefits. The Medicare portion covers your may be able to access for Medicare at age 65.

Because you pay both the employee and employer share of these taxes, you build credits toward Social Security and Medicare faster than a traditional employee would at the same income level. However, you also bear the full cost yourself rather than splitting it with an employer.

If you have both W-2 employment income and self-employment income in the same year, your Social Security tax is calculated on the combined total, but only up to the annual cap. Once you reach the cap through W-2 wages, you do not owe additional Social Security tax on self-employment income.

Frequently Asked Questions

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

No. The IRS threshold is $400 in net self-employment income. If you earned less than that after subtracting business expenses, you do not owe self-employment tax. You may still owe income tax on that amount, depending on your total income and filing status.

Can I deduct half of my self-employment tax on my return?

Yes. You can deduct half of your self-employment tax as a business expense, which lowers your adjusted gross income and reduces your overall tax bill. This deduction is separate from the standard deduction or itemized deductions you may claim.

What happens if I do not pay quarterly estimated taxes?

The IRS charges interest and penalties on any unpaid taxes when you file your return. The penalty is typically 0.5 percent per month of the unpaid amount. Paying quarterly, even if your estimate is not perfect, usually costs less than paying everything at once and facing penalties.

Do I owe self-employment tax on income from a side gig or hobby?

If your side work is a genuine business — meaning you intend to make a profit and operate it regularly — you owe self-employment tax on net income of $400 or more. If it is a hobby that occasionally generates income, the rules are different. The IRS looks at factors like whether you keep records, advertise, and have made a profit in at least three of the last five years.

How do I know what to put on my quarterly estimated tax payment?

The IRS provides Form 1040-ES, which includes a worksheet to calculate your estimated quarterly payment. You estimate your year's income and expenses, calculate your expected tax, and divide by four. If your income is unpredictable, you can adjust each quarter based on actual earnings so far.