What It Is, How To Calculate It

If you’re self-employed, you’ll likely be on the hook to pay self-employment taxes for Social Security and Medicare, in addition to income taxes. Because you don’t have an employer who is withholding these payroll taxes from your paycheck, it’s your responsibility to keep track of and then pay your estimated taxes four times a year.

The self-employment tax rate for 2024 and 2025 is 15.3 percent, which is the combined total of Social Security and Medicare taxes. It’s important to understand how the self-employment tax works, who it applies to and how to calculate and pay this tax.

Self-employment tax: What it is

The self-employment tax applies to people who work for themselves and consists of Social Security and Medicare taxes. By applying a tax to self-employed individuals, the federal government ensures that all workers in the economy contribute to these programs.

The self-employment tax rate is 15.3 percent. It’s the sum of a 12.4 percent tax for Social Security and a 2.9 percent tax for Medicare. While employers deduct these payroll taxes on behalf of their workers, people who are self-employed must file the self-employment tax directly with the IRS.

And, while employers and employees typically split the amount of tax due for Social Security and Medicare, self-employed people are responsible for paying the full 15.3 percent on their own.

Who has to pay self-employment tax

The self-employment tax applies to people who are small-business owners, independent contractors, freelancers, gig workers or otherwise in business for themselves. If you receive a 1099 form, including for goods or services you sell through Venmo, Paypal, eBay and other apps, those earnings may be subject to self-employment tax.

You’ll generally have to pay the self-employment tax if either of the following applies to your situation:

• Your net earnings from self-employed work exceeded $400.
• You earned $108.28 or more in income from church employment.

Self-employment tax rate

For both tax years 2024 and 2025, the self-employment tax rate is 15.3 percent. That tax rate includes both the 12.4 percent tax for Social Security and the 2.9 percent tax for Medicare. The self-employment tax is just a portion of the overall taxes you must pay. You’ll still need to pay income tax — the income tax rate you pay is determined by which tax bracket you fall into.

While the self-employment tax rate is 15.3 percent, there’s a cap on the amount of net earnings that are subject to the Social Security tax. Also, there’s an additional Medicare tax if your income exceeds a certain threshold.

• Only the first $168,600 of your combined wages, tips, and net earnings is subject to the Social Security tax for tax year 2024. That amount increases to $176,100 for tax year 2025.
• For both 2024 and 2025, you are liable for an additional 0.9 percent Medicare tax on income that exceeds $200,000 if you’re a single filer or $250,000 if you’re married filing jointly.

How self-employment tax is calculated

Calculating your self-employment tax can be fairly straightforward so long as you are using the correct measure of earnings — net earnings rather than gross earnings. Here’s a step-by-step guide to calculate your self-employment tax:

1. Before applying the tax, first subtract any deductions, such as business expenses, to get at your net earnings. You’ll use Schedule C to report income from self-employed work and calculate your net earnings.
2. Generally, a maximum of 92.35 percent of your net earnings is subject to the self-employment tax. Apply the 15.3 percent tax rate to that portion of your net earnings, bearing in mind the income cap on the Social Security portion of the self-employment tax and the additional Medicare tax that may apply if your income exceeds the relevant threshold. Use Schedule SE to guide you as you calculate the self-employment tax that’s due on your net earnings.
3. Keep in mind that you can also deduct half of your self-employment tax — the employer-equivalent portion — when it comes time to figure your adjusted gross income on Form 1040.

If you had only a small amount of self-employment income or a loss, there are a couple of alternative methods for figuring your tax. Using one of these optional methods may help you get credit toward your Social Security earnings, and may increase your earned income credit or your child and dependent care credit, the IRS says. See the Schedule SE instructions for more information.

When to pay self-employment tax

If you’re self-employed, the IRS expects you to pay estimated taxes — which include Social Security, Medicare, and income taxes — each quarter. In fact, waiting to pay until you file taxes in April may mean you’ll get hit with late-payment penalties. People who don’t have taxes withheld from their paychecks generally are required to pay estimated taxes four times a year.

Estimated taxes may be submitted using Form 1040-ES by the following deadlines in 2024 and 2025:

How to reduce your self-employment tax

Not only do you get to avoid having a boss, but being self-employed also means you can benefit from some potentially valuable tax deductions. Among the deductions to consider:

• You can deduct the employer-equivalent portion of the self-employment tax.
• The qualified business income deduction allows eligible self-employed taxpayers to deduct up to 20 percent of qualified business income (QBI), and is available whether you itemize or take the standard deduction.
• Some of the tax deductions that apply to small-business owners more broadly may be applicable to you, and include the amount you pay for utilities, marketing costs, insurance, retirement contributions, rent and other expenses.

Finally, you may be able to reduce some of your overall tax burden by being mindful of when you are paid — something you may or may not have direct control over, depending on the nature of your work. If you’re approaching a significant income threshold late in the year and you might get bumped into a higher tax bracket, you may be able to hold off on invoicing such that you are paid for that work in the following year.