What is Self-Employment Tax
Self-employment tax is the Social Security and Medicare tax that self-employed individuals must pay on their net earnings — covering both the employee and employer portions of these taxes, totaling 15.3%.
Self-employment tax is the federal tax that covers Social Security and Medicare contributions for people who work for themselves. Traditional employees pay 7.65% of their wages toward these programs, and their employer pays a matching 7.65%. Self-employed individuals — freelancers, independent contractors, sole proprietors, and small business owners — have no employer to cover the other half, so they pay both halves for a combined rate of 15.3% on net self-employment earnings.
This is a separate tax from federal (and state) income tax. Self-employed workers pay both.
How Self-Employment Tax Is Calculated
The combined 15.3% breaks down as:
- 12.4% for Social Security — but only up to the annual wage base ($176,100 in 2025)
- 2.9% for Medicare — no cap on the wage base
- An additional 0.9% Medicare surtax applies to earnings above $200,000 (single) or $250,000 (married filing jointly)
The tax is calculated on net self-employment income — gross earnings minus allowable business deductions.
The Schedule SE
Self-employment tax is calculated on Schedule SE and attached to your Form 1040. The IRS applies it to 92.35% of net self-employment income (not 100%) because this adjustment accounts for the deductible portion of SE tax.
Deduction for Half of SE Tax
One significant offset: the IRS allows self-employed workers to deduct half of their self-employment tax from their gross income when calculating federal income tax (though not for SE tax itself). This effectively reduces the income tax portion of the bill.
Comparison: Employee vs. Self-Employed
| Employee | Self-Employed | |
|---|---|---|
| Social Security | 6.2% (employee share) | 12.4% |
| Medicare | 1.45% | 2.9% |
| Who pays employer share | Employer | You |
| Withholding | Automatic each paycheck | Estimated quarterly payments |
Quarterly Estimated Tax Payments
Because self-employment taxes aren't withheld automatically, the IRS expects quarterly estimated payments (due in April, June, September, and January). Missing these payments can trigger an underpayment penalty — even if you pay the full amount at tax time.
A common approach: estimate your annual self-employment income, calculate the combined income + SE tax owed, and divide by four.
Strategies to Reduce Self-Employment Tax
- Maximize business deductions — Every dollar of legitimate business expense reduces your net self-employment income (and therefore SE tax)
- S-Corp election — At higher income levels (typically $40,000+ in net profit), some self-employed individuals elect S-Corp status. The owner pays themselves a reasonable salary (subject to SE tax) but takes additional profit as a distribution (not subject to SE tax). This can meaningfully reduce the SE tax burden, though it introduces additional administrative costs
- Health insurance deduction — Self-employed health insurance premiums are deductible from gross income
- Retirement contributions — Contributing to a SEP-IRA or Solo 401(k) reduces taxable net income
Self-employment taxes are one of the most significant — and often surprising — transition costs for people moving from traditional employment to freelance or contract work. Accounting for the 1099 form income, setting aside reserves, and understanding available deductions is essential to avoiding a painful tax bill in April.