What Is Self-Employment Tax?

Self-employment tax refers to the taxes self-employed individuals must pay to cover their contributions to Social Security and Medicare. Unlike traditional employees, whose payroll taxes are automatically withheld by their employers, self-employed individuals are responsible for calculating and remitting these taxes themselves. The self-employment tax exists to ensure that those who work for themselves still contribute to the same federal programs that benefit all workers in retirement or disability situations.

What Is Included in the Self-Employment Tax?

Self-employment tax specifically includes two components: the Social Security tax and the Medicare tax. These two parts mirror the Federal Insurance Contributions Act (FICA) taxes that are paid by employees and employers in the traditional workforce. The rates are also similar but applied differently due to the nature of self-employment.

For employees, Social Security tax is 6.2%, and Medicare tax is 1.45%, totaling 7.65%. Employers match that amount, resulting in a total of 15.3% paid per worker. Self-employed individuals are required to pay the full 15.3% themselves since there is no employer to share the burden. Of this, 12.4% goes to Social Security (up to an annual income cap) and 2.9% to Medicare. High earners may also be subject to an additional 0.9% Medicare tax on income above a certain threshold.

Who Pays Self-Employment Tax?

Generally, anyone who earns $400 or more in net earnings from self-employment during the tax year must pay self-employment tax. This includes:

• Independent contractors
• Freelancers
• Sole proprietors
• Partners in a business
• Certain members of limited liability companies (LLCs)

This tax also applies to individuals operating under informal arrangements or side gigs if the income meets or exceeds the reporting threshold. Religious workers who are not employees of a church may also be subject to self-employment tax. Some exemptions exist, but they are specific and typically apply to members of certain religious sects that are conscientiously opposed to public insurance.

How the Tax Is Calculated

The self-employment tax is based on net earnings from self-employment, not gross income. To determine net earnings, a self-employed individual subtracts ordinary and necessary business expenses from total income. Only 92.35% of the net earnings are subject to self-employment tax. This adjustment accounts for the employer-equivalent portion of the tax, which is deductible for income tax purposes.

For example, if a freelancer earns $100,000 in net income, 92.35% of that—$92,350—is subject to self-employment tax. The total self-employment tax on that amount would be 15.3%, or about $14,122.55. The individual would then be allowed to deduct the “employer-equivalent” portion (half) of the tax—$7,061.28—from their adjusted gross income when filing their income tax return.

Filing and Payment Requirements

Self-employed individuals file their self-employment tax using Schedule SE (Form 1040 or 1040-SR). This schedule helps calculate the total tax owed based on net self-employment income. In addition to paying the self-employment tax, individuals are still responsible for federal and state income taxes, which are calculated separately.

Because self-employment tax is not withheld throughout the year, many self-employed people must make estimated tax payments on a quarterly basis. The IRS typically expects payments to be made in April, June, September, and January for the previous year's earnings. Failing to make adequate payments throughout the year can result in penalties, even if the full amount is eventually paid by the tax filing deadline.

Special Considerations

There are certain income thresholds and additional rules that apply in specific circumstances:

• Social Security Wage Cap: The 12.4% portion of the self-employment tax for Social Security only applies to earnings up to a specific annual limit, which is adjusted yearly for inflation. Any income above that limit is not subject to the Social Security portion.
• Additional Medicare Tax: High-income earners may be subject to an additional 0.9% Medicare tax on wages, compensation, or self-employment income over $200,000 for single filers or $250,000 for joint filers. This additional tax is not matched by an employer equivalent and is paid entirely by the individual.
• Multiple Sources of Income: If someone has both wage income and self-employment income, the wage income is counted first toward the Social Security cap. Only the remaining amount of self-employment income (up to the cap) would be subject to the Social Security portion of the tax.

The Bottom Line

Self-employment tax is a critical obligation for individuals who earn income outside of traditional employment. It ensures that all working individuals contribute to Social Security and Medicare, regardless of how they earn a living. While the tax rate may appear higher than for wage earners, it reflects the fact that self-employed individuals are responsible for both the employer and employee shares. Understanding how self-employment tax works—especially how it is calculated, filed, and paid—can help self-employed individuals plan more effectively for tax time and avoid unnecessary penalties.