Self-employment tax is the Social Security and Medicare tax that people who work for themselves pay on their business profit. It totals 15.3%: 12.4% for Social Security, which applies only up to an annual wage cap, and 2.9% for Medicare. It's calculated on 92.35% of your net self-employment earnings, and it's owed on top of regular income tax, which is why it surprises so many new freelancers and owners.
This guide is for sole proprietors, freelancers, independent contractors and partners who want to understand what they owe and why. You'll get the calculation step by step, a worked example, a side-by-side with being an employee, and the planning moves that actually affect the number. It's general education, so confirm your specifics with a CPA or tax professional.
How self-employment tax works
When you work for an employer, Social Security and Medicare taxes (often called FICA) are split. You pay 7.65% through payroll withholding, and your employer pays a matching 7.65%. When you work for yourself, you are both the employee and the employer, so you pay both halves. That combined 15.3% is self-employment tax.
Three mechanics matter:
- The 92.35% adjustment. You don't pay the tax on your full net profit. You pay it on 92.35% of it. This mimics the fact that employees don't pay FICA on the employer's half of FICA.
- The Social Security cap. The 12.4% Social Security portion stops once your combined wages and self-employment earnings reach the annual wage base, which is adjusted each year. The 2.9% Medicare portion has no cap. High earners may also owe an additional Medicare tax above a set income level. Check the current IRS figures.
- The deduction for half. You can deduct half of your self-employment tax when figuring your income tax. It doesn't reduce the self-employment tax itself, but it lowers your taxable income.
Who has to pay self-employment tax?
Generally, you owe it if you earn net profit from a trade or business you operate yourself, above a small minimum the IRS sets. That typically includes:
- Sole proprietors and single-member LLCs taxed as sole proprietorships
- Freelancers and independent contractors who receive 1099 forms
- General partners and many members of multi-member LLCs, on their share of business income
- People with a side business, even if they also have a full-time job
Owners of corporations are treated differently. If your business is taxed as an S corporation or C corporation and you work in it, you're typically paid a salary through payroll, and FICA applies to that salary instead. Entity choice has trade-offs well beyond this one tax, so it's worth a conversation with a CPA before changing.
How to calculate self-employment tax, step by step
- Find your net profit. Business income minus deductible business expenses. For a sole proprietor, this is the bottom line of the business schedule on your tax return.
- Multiply by 92.35%. This gives your net earnings subject to self-employment tax.
- Apply 12.4% for Social Security to that amount, up to the current year's wage base. If you also had W-2 wages, those count toward the cap first.
- Apply 2.9% for Medicare to the full amount.
- Add them together. That's your self-employment tax.
- Deduct half when calculating adjusted gross income for income tax.
For quick planning below the Social Security cap, a shortcut works: 92.35% × 15.3% ≈ 14.13% of net profit.
Worked example: a freelance graphic designer
Suppose a hypothetical freelance designer bills $96,000 in a year and has $16,000 in deductible business expenses: software, a new laptop, a home office, and so on. Assume the designer has no other wages and earns below the Social Security cap.
- Net profit: $96,000 − $16,000 = $80,000
- Net earnings subject to the tax: $80,000 × 92.35% = $73,880
- Social Security portion: $73,880 × 12.4% = $9,161.12
- Medicare portion: $73,880 × 2.9% = $2,142.52
- Total self-employment tax: $9,161.12 + $2,142.52 = $11,303.64
- Deduction for half: $11,303.64 ÷ 2 = $5,651.82 off income subject to income tax
The shortcut checks out: $80,000 × 14.13% ≈ $11,304. The designer owes this in addition to federal income tax and any state or local income tax. To run your own numbers, use our self-employment tax calculator.
What one more deductible expense is worth
Every legitimate business expense lowers self-employment tax as well as income tax. At the designer's level, an extra $1,000 of deductible expense reduces self-employment tax by $1,000 × 14.13% ≈ $141, before counting the income tax savings. That's a reason to track expenses carefully. It's not a reason to buy things you don't need, since you'd still be spending $1,000 to save a fraction of it. Our list of deductions owners commonly miss is a good place to check what you might be leaving out.
How self-employment tax compares with being an employee
| Employee earning $80,000 salary | Self-employed with $80,000 net profit | |
|---|---|---|
| Who pays Social Security and Medicare | Split between employee and employer | You pay both halves |
| Your share | $80,000 × 7.65% = $6,120, withheld from pay | $11,303.64, paid through estimated taxes |
| Employer's share | $6,120, paid by the employer | Included in your total |
| How it's paid | Automatically, every paycheck | Quarterly estimates you calculate and send |
| Offsetting deduction | None for the employee | Half of SE tax deducted for income tax |
The combined FICA paid on an $80,000 employee is $12,240, a little more than the self-employed designer's $11,303.64. The difference is the 92.35% adjustment. The real shock for the self-employed isn't the rate. It's that nobody withholds it for you.
How to plan for self-employment tax
Because no one withholds it, planning is the whole game. A few habits make it manageable:
- Set aside a percentage of every payment. Start with about 14% for self-employment tax, then add your expected income tax rate on top. Move it to a separate savings account the day money comes in.
- Pay quarterly estimates. The IRS expects tax to be paid through the year. Underpaying can bring penalties. Our guide to quarterly estimated taxes explains the schedule and how to size payments.
- Keep clean books. Every missed deduction costs you in both self-employment and income tax.
- Understand what retirement contributions do. Contributions to plans like a SEP IRA or solo 401(k) can reduce income tax, but for sole proprietors they generally don't reduce self-employment tax. Plan accordingly.
- Review your entity once profit is steady. At some profit levels, an S corporation election can change how much payroll tax you pay, because only a reasonable salary is subject to it. It also adds payroll costs, filings and scrutiny of what counts as reasonable. Model it with a CPA before deciding.
Common self-employment tax mistakes
- Budgeting only for income tax. Many new freelancers set aside what an employee would see withheld and come up short. Plan for self-employment tax as its own line.
- Calculating on gross revenue. The tax is based on net profit, not total billings. Track expenses so you aren't overestimating, or underestimating because you forgot income.
- Forgetting the 92.35% step. Multiplying net profit by 15.3% overstates the tax slightly. Use the adjusted base.
- Skipping quarterly payments. Paying everything in April can mean penalties and a painful lump sum. Schedule estimates on the calendar.
- Assuming an LLC changes it automatically. A single-member LLC is taxed like a sole proprietorship by default, so self-employment tax still applies. Only a tax election changes that.
- Chasing an entity change for tax alone. The savings can shrink once payroll costs and a reasonable salary are factored in. Run the full numbers first.
Where AI can help
AI tools are handy for the bookkeeping side. Export a year of bank and card transactions and ask an assistant to sort them into business and personal, group business expenses into categories, and flag recurring charges you might have missed. You can also ask it to build a simple spreadsheet that calculates self-employment tax on your year-to-date profit using the 92.35% and 15.3% steps, so you can see your set-aside target each month.
Don't rely on it for current-year limits, filing rules or entity advice. Tax figures change each year, and an AI tool can state an outdated number with confidence. Verify thresholds against current IRS guidance and bring the big questions to your tax professional.
Frequently asked questions
Is self-employment tax the same as income tax?
No. Self-employment tax funds Social Security and Medicare. Income tax is separate and is calculated on your taxable income after deductions. Most self-employed people owe both, often paid together through quarterly estimates.
Do I pay self-employment tax if my business lost money?
Generally no. If your net profit is zero or negative, there are no net earnings for the tax to apply to. The loss may also affect your income tax, so keep good records either way.
Do I pay self-employment tax on a side business if I already have a job?
Yes, on the side business's net profit. Your W-2 wages do count toward the Social Security wage cap, so very high earners may owe only the Medicare portion on part of their self-employment income.
What percentage should I set aside for taxes as a freelancer?
Start with roughly 14% of net profit for self-employment tax, then add your estimated federal and state income tax rate. Your total will depend on your income, deductions and state. A tax professional can help you set a more precise number.
Key takeaways
- Self-employment tax is 15.3% in total: 12.4% Social Security (up to an annual cap) plus 2.9% Medicare.
- It's calculated on 92.35% of net profit, which works out to about 14.13% of profit below the cap.
- You can deduct half of it when figuring income tax.
- No one withholds it for you, so set money aside from every payment and pay quarterly estimates.
- Deductions, not retirement contributions, are what lower it for sole proprietors; entity changes need a full analysis with a CPA.
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