What Is the Self-Employment Tax?
Self-employment tax is the payment that self-employed people and small business owners owe the federal government to fund Medicare and Social Security. It is paid in lieu of the usual payment by employers of their share of their employees' Federal Insurance Contributions Act (FICA) tax.
You must pay this tax if your net earnings from self-employment exceed $400 in a year, or if you earn $108.28 or more from a tax-exempt church. If your earnings from self-employment fall below these thresholds, you're not required to pay self-employment tax.
The current self-employment tax rate is 15.3%, consisting of 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance). The tax is computed and reported on IRS Form 1040 Schedule SE. Individuals who make less than these thresholds from self-employment don’t have to pay the tax.
Key Takeaways
- Self-employment tax is collected from people who earn income but don't pay withholding taxes through an employer.
- The self-employment tax funds Social Security and Medicare and is reported on IRS Form 1040 Schedule SE.
- Workers who are considered self-employed include sole proprietors, freelancers, and independent contractors who carry on a trade or business.
- Individuals who are self-employed and earn less than $400 a year (or less than $108.28 from a church) are exempt from paying the self-employment tax.
How the Self-Employment Tax Works
The self-employment tax is collected from workers who earn income but don't pay withholding taxes through an employer. This includes sole proprietors, freelancers, and independent contractors who carry on a trade or business. A member of a partnership that carries on a trade or business may also be considered to be self-employed.
Self-employed individuals must pay self-employment tax as a condition of receiving Social Security benefits upon retirement.
In any business, both the company and the employee are taxed to pay for the two major social welfare programs: Medicare and Social Security. In the eyes of the IRS, individuals who are self-employed are considered both the company and the employee, which is why they must pay both portions of this tax.
Self-Employment Tax Rates
For self-employed individuals, Social Security tax is 12.4% of income, split evenly between what would typically be the employer's and employee's share, totaling 6.2% each.
The Social Security tax is applied only to the first $160,200 of self-employment income earned in 2023, rising to $168,600 in 2024.
Additionally, Medicare tax is charged at 2.9%, also divided equally between the employer's and employee's contributions (1.45% each), with no cap on the income subject to this tax.
Therefore, the total self-employment tax rate is 15.3% (12.4% + 2.9%).
Self-employed individuals are required to make quarterly tax payments, which are due on April 15, June 15, September 15, and January 15 of each year.
Deducting Self-Employment Taxes
There are two deductions related to income tax that can lower your taxes if you're self-employed. The IRS lets you deduct half of your self-employment tax, or 7.65% of the total 15.3% tax rate, directly from your income.
First, your net self-employment income is reduced by half of your total Social Security tax, mirroring the tax treatment of employees, where the employer’s contribution to Social Security tax isn’t counted as employee wages.
Next, you can deduct half of your Social Security tax on IRS Form 1040. This deduction is taken from your gross income to calculate your adjusted gross income and is not an itemized deduction. It should not be included on your Schedule C.
Self-employment tax is a tax-deductible expense. The IRS allows you to deduct the employer-equivalent portion of your self-employment tax (7.65%, representing half of the total 15.3% tax rate) directly from your income, which effectively reduces the income tax you owe.
Special Considerations
People who are self-employed aren't subject to automatic tax withholding from an employer. Therefore, quarterly estimated tax payments are required to cover their federal and state income taxes as well as the FICA taxes.
The deferred payments for a portion of self-employment taxes, included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, have expired. The act deferred payment of the employer portion of self-employment taxes attributable to Social Security for the period from March 27, 2020, through Dec. 31, 2020. It deferred payment of 50% of those taxes until Dec. 31, 2021, and the other 50% until Dec. 31, 2022.
High-income earners face an additional self-employment tax. As a result of theAffordable Care Act (ACA) earnings above $200,000 ($250,000 for married couples filing jointly, $200,000 for single taxpayers, and $125,000 for married filing separately) are subject to an additional 0.9% Medicare tax.
Example of the Self-Employment Tax
Individuals who are self-employed typically calculate their self-employment tax on 92.35% of their net earnings, not the full 100%.
For example, if someone’s HR consulting business nets $200,000 in 2024 after expenses, their self-employment tax is calculated on 92.35% of that amount, which equals $184,700. Since this is over the Social Security tax cap, the calculation for their self-employment tax would be based on this adjusted figure. The total self-employment tax on $184,700 would be $23,063.50:
($142,800 x 12.4%) + ($184,700 x 2.9%)
$17,707.20 + $5,356.30 = $23,063.50
When filing their income tax return, they can claim an above-the-line deduction for half of their self-employment tax, or $23,063.50 ÷ 2 = $11,531.75. In effect, they get a deduction on the employer portion (6.2% Social Security + 1.45% Medicare = 7.65%) of their self-employment tax.
How Do I Pay My FICA Tax If I'm Self-Employed?
Self-employed individuals, freelancers, and small business owners use IRS Form 1040 Schedule SE to report FICA taxes, which fund Social Security and Medicare. Since the IRS considers self-employed people as both employer and employee, they are responsible for paying both halves of the FICA taxes.This means you'll pay 15.3% in self-employment taxes—12.4% for Social Security on income up to the taxable earnings limit and 2.9% for Medicare with no income limit.
Do I Have to Pay Social Security Tax on My Side Gig?
If you earn $400 or more annually from self-employment, including side jobs like selling items on Etsy or doing odd jobs for neighbors, you are required to pay Social Security and Medicare taxes, collectively known as FICA taxes, on your income above $400. These taxes fund your future Social Security and Medicare benefits, and are necessary to meet IRS rules for self-employed workers.
Have FICA Taxes Gone Up in Recent Years?
The current Social Security tax rate of 6.2% has been in place since 1990.
The most significant recent adjustment to the Medicare tax rate occurred in 2010 with the Affordable Care Act, which introduced a 0.9% increase for high-income earners to support broader health insurance coverage.
The Bottom Line
Self-employed individuals must pay taxes directly to fund their future Social Security and Medicare benefits, unlike traditional employees whose employers handle tax deductions. As both the employer and employee, you're responsible for the full 15.3% tax rate covering Social Security and Medicare contributions.
To manage self-employment taxes, you'll make quarterly tax payments and can take advantage of specific deductions to reduce your tax owed. Since self-employment taxes can be complex, consulting with a tax advisor is a good idea, as it can ensure you meet your tax obligations and make the most of potential deductions.
