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're self-employed. Unlike employees, who have these taxes split between them and their employer, self-employed people pay the full amount themselves. The combined rate is 15.3 percent of your net self-employment income: 12.4 percent for Social Security and 2.9 percent for Medicare.

You calculate self-employment tax on your net profit — what you earn minus your business expenses — not your total revenue. This is different from income tax, which you also owe separately. Self-employment tax is reported on Schedule SE (Form 1040), which you file with your annual tax return.

Key Takeaways

  • Self-employment tax is 15.3 percent total: 12.4 percent for Social Security and 2.9 percent for Medicare, calculated on your net business profit.
  • You pay both the employee and employer portion yourself, unlike W-2 workers whose employers cover half.
  • Self-employment tax and income tax are separate; you owe both, though you can deduct half of your self-employment tax when calculating income tax.
  • The Social Security portion (12.4 percent) only applies to income up to an annual cap, which changes each year; Medicare has no cap.
  • You must file Schedule SE with your tax return if your net self-employment income is $400 or more in a year.

How the 15.3 percent rate breaks down

The 15.3 percent self-employment tax rate consists of two parts. The Social Security portion is 12.4 percent, but it only applies to the first $168,600 of your net self-employment income in 2024 (this cap increases most years). Once your income exceeds that threshold, you stop paying the 12.4 percent Social Security tax on additional earnings.

The Medicare portion is 2.9 percent and has no income cap — you pay it on all your net self-employment income. Additionally, if your net self-employment income exceeds $200,000 (or $250,000 if married filing jointly), you owe an extra 0.9 percent Medicare tax on the amount above that threshold. This additional tax was added in 2013 and applies to high earners.

Why you pay more than employees

An employee and employer each pay half of Social Security and Medicare taxes. The employee sees 7.65 percent withheld from their paycheck, and the employer pays another 7.65 percent. When you're self-employed, you are both the employee and the employer, so you pay the full 15.3 percent.

However, the tax code gives you one break: you can deduct half of your self-employment tax when you calculate your adjusted gross income for income tax purposes. This reduces the amount of income subject to income tax, but it does not reduce the self-employment tax itself. The deduction is taken on Form 1040, not on Schedule SE.

When you have to file Schedule SE

You must file Schedule SE if your net self-employment income is $400 or more in a tax year. This $400 threshold is separate from whether you owe income tax — you could owe self-employment tax even if your income is too low to owe income tax.

If your net self-employment income is less than $400, you do not file Schedule SE, but you may still want to file a tax return if you had income tax withheld or if you are due a refund. Self-employed people should track their income and expenses throughout the year to know whether they will cross the $400 threshold.

Calculating your net self-employment income

Self-employment tax is based on net profit, not gross revenue. Your net profit is your total business income minus your business expenses. Common deductible expenses include supplies, equipment, rent or mortgage for a home office, vehicle mileage, insurance, and professional services.

You calculate net profit on Schedule C (Form 1040) if you are a sole proprietor, or on the appropriate business tax form if you operate as an LLC, S-corporation, or partnership. Once you have your net profit from Schedule C, you transfer it to Schedule SE to calculate your self-employment tax. Keep records of all income and expenses so you can accurately report your net profit.

Estimated tax payments throughout the year

Self-employed people usually cannot wait until tax day to pay their taxes. Instead, you make quarterly estimated tax payments on April 15, June 15, September 15, and January 15. These payments cover both your income tax and self-employment tax for the year.

To calculate your quarterly payment, estimate your total net self-employment income for the year, calculate what you will owe in self-employment tax and income tax, and divide by four. If you underestimate and owe more at tax time, you may owe a penalty. If you overpay, you receive a refund. Many self-employed people use tax software or work with a tax professional to calculate the correct quarterly amount.

State and local self-employment taxes

Self-employment tax is a federal tax only. However, some states and cities impose additional income taxes on self-employed people. A few states have no income tax at all, while others tax self-employment income at the same rate as W-2 income. Some cities, such as New York City, also tax self-employment income.

Check your state and local tax rules to see whether you owe additional taxes beyond the federal self-employment tax. State and local taxes are separate from federal self-employment tax and are reported on different forms.

Frequently Asked Questions

Do I owe self-employment tax if I have a side business while working a W-2 job?

Yes. Self-employment tax applies to all your self-employment income, regardless of whether you also have a W-2 job. You file Schedule SE based on your net profit from the side business. Your W-2 income does not affect your self-employment tax calculation, though it does affect your total income tax.

Can I reduce my self-employment tax by forming an S-corporation?

Possibly. S-corporation owners can pay themselves a reasonable salary (subject to payroll taxes) and take the rest as a distribution, which avoids self-employment tax on the distribution portion. However, this strategy has costs and complexity, and the IRS scrutinizes unreasonably low salaries. Consult a tax professional to see whether this structure makes sense for your situation.

What happens if I do not pay my self-employment tax?

If you do not pay self-employment tax owed, the IRS charges interest and penalties on the unpaid amount. Unpaid taxes can also affect your Social Security record if you do not pay the Social Security portion. If you cannot pay in full, contact the IRS about payment plans or other options.

Does self-employment tax count toward my Social Security benefits?

Yes. The Social Security portion of self-employment tax (12.4 percent) is credited toward your Social Security record, just like payroll taxes for W-2 employees. This means self-employment income counts toward your work history and future Social Security benefits.