For full-time employees, taxes are usually out of sight, out of mind until the filing deadline rolls around every April. But for self-employed individuals—whether you have a part-time side gig, full-time freelance work, or a thriving small business—taxes are a regular part of managing your business and personal finances.
Without an employer automatically withholding taxes from your paycheck, it’s up to you to figure out your tax liability, including how much you owe, and when and how to pay. While some taxes will be familiar—like state or federal income taxes—working for yourself also comes with an entirely new category to consider: self-employment taxes.
- Self-employed individuals must pay self-employment tax for Social Security and Medicare.
- The tax rate is 15.3% of the entire amount of self-employment income.
- Anyone earning $400 or more in self-employment typically must pay self-employment tax.
Read on for more about self-employment taxes and how to calculate them.
What is self-employment tax?
Self-employment tax, officially known as the Self-Employment Contributions Act (SECA) tax, is a required contribution from self-employed individuals to the federal government to fund Social Security and Medicare programs. You’re considered self-employed if you’re a freelancer, gig worker, independent contractor, sole proprietor, or small business owner.
While full-time employees also pay Social Security taxes and Medicare taxes, they share the cost with employers as part of the Federal Insurance Contributions Act (FICA): Employees pay 6.2% of gross income to Social Security and 1.45% to Medicare in each paycheck, and their employers match these percentages, for a total of 15.3%. However, those who are self-employed are responsible for the entire 15.3% tax rate: 12.4% to Social Security and 2.9% to Medicare.
How to calculate self-employment tax
Anyone who earns $400 or more in self-employment income typically has to pay self-employment tax. You owe this tax on your net self-employment earnings (your earnings after your business expenses).
The tax is divided into two parts—Social Security and Medicare tax—and how much you pay for each part is calculated differently.
How to calculate Social Security tax
As of 2022, self-employed individuals owe 12.4% for Social Security on their first $147,000 of net earnings. If you make more than $147,000 in a year, the rest of your earnings are not taxed for Social Security.
How to calculate Medicare tax
As of 2022, self-employed individuals pay 2.9% on their first $200,000 of net earnings for Medicare. (If you’re married, then you’ll pay 2.9% on the first $250,000 of combined self-employment earnings filing jointly, or $125,000 filing separately.) For earnings over $200,000 ($250,000 for those married filing jointly; $125,000 for those married filing separately), you’ll pay an additional 0.9% in Medicare taxes (meaning your tax rate increases to 3.8% for any income earned over the threshold).
Unlike the Social Security portion, there’s no maximum amount for the Medicare portion of self-employment tax.
How to pay self-employment tax
The US has a “pay-as-you-go” tax system, which means that people pay taxes as they earn money throughout the year. Employers withhold taxes from full-time employees’ paychecks and pay it to the government on their behalf. For self-employed individuals, however, it’s a bit more complicated.
If you expect to owe more than $1,000 annually in taxes, you’re responsible for making estimated tax payments to the IRS every quarter by mail, online, or through the IRS2Go app. These tax payments include both income tax and self-employment tax. At the end of the year, you’ll also file an annual tax return using Schedule SE (Form 1040) to report your self-employment taxes.
When to pay estimated taxes
The quarterly deadlines to pay estimated taxes are April 15, June 15, September 15, and January 15 of the following year (unless one of these dates falls on a weekend or federal holiday, in which case the deadline is pushed to the next business day). If you do not pay taxes by the deadlines, you’ll owe an underpayment penalty fee when you file your taxes the following April. The penalty fee is calculated by the IRS based on the amount of the underpayment, the original due date, and their current interest rate for underpayments (6% as of October 1, 2022).
How to calculate quarterly estimated tax payments
There are two main ways to calculate your estimated taxes and avoid the underpayment penalty fee.
- Use Form 1040-ES. If it’s your first year being self-employed, the Estimated Tax for Individuals Form includes a worksheet to help you figure out your estimated tax based on your adjusted gross income, taxable income, tax deductions, and credits for the year. You may want to consider working with an accountant to help you determine what you owe. If you pay at least 90% of what you owe, you will not face a fee.
- Pay 100% of what you owed last year. If you have a previous year of self-employment income and expect to earn a similar amount, you can calculate your quarterly payments based on what you paid last year. If you pay 100% in quarterly payments of what you owed the previous tax year, you will not face a penalty fee—even if you actually end up owing more than you paid. (And, if you owe less, you’ll receive a tax refund.)
Tax deductions for self-employed people
Self-employment tax often takes people by surprise when they start working for themselves since it’s more than they’re used to paying for Social Security and Medicare taxes. The good news is that even though you’re responsible for paying the entirety of these taxes, part of your payment is also tax deductible.
Self-employment tax deduction
There are two ways self-employment tax operates as a deduction. First, when you’re calculating how much self-employment tax you owe, you can reduce your net earnings by half of the self-employment tax before you apply the tax rate.
For example, if you earn $100,000, you would theoretically owe $15,300 (15.3%) in self-employment tax. However, self-employed individuals are allowed to deduct half of that tax—the employer equivalent of the FICA tax rate (7.65%)—from their tax-eligible net earnings. Ultimately, this means you only pay self-employment tax on 92.35% of your net earnings (in this example, $92,350)—amounting to $14,129.55 ($92,350 x 0.153).
Second, you can claim 50% of what you pay in self-employment taxes as a self-employment tax deduction on your income. In the above example, you could deduct your taxable income by $7,064.76.
Business tax deductions
Certain costs of running your business as a self-employed individual qualify as tax deductible, such as:
- Advertising and marketing costs
- Bank fees
- Business travel
- Mobile phone and internet costs
- Continued education
- Health insurance premiums
- Home office deduction (including a portion of rent and utilities)
- Legal fees
- Startup costs (such as the fees to form a limited liability corporation)
- Tax advice and preparation fees
These costs can be subtracted from your self-employment revenue and lower your taxable income, reducing the amount of money you owe at the end of the tax year.
Personal tax deductions
Certain personal expenses also qualify as tax-deductible (for both full-time and self-employed individuals), such as:
- Charitable donations
- Medical expenses
- Mortgage interest
- Moving expenses
- Retirement contributions
- Student loan interest
Self-employment tax FAQ
Do you pay more taxes if you're self-employed?
Self-employed individuals generally pay more in taxes. However, you are also eligible to deduct half of your self-employment tax, as well as write off personal and business tax deductions, to reduce your overall tax burden.
How much should I set aside for self-employment taxes?
Start by estimating your net self-employment earnings. Then, calculate 92.35% of these earnings to account for the self-employment tax deduction. As a general rule of thumb, you should aside 15.3% of these reduced net earnings for paying self-employment tax.
Why is there a self-employment tax?
Self-employment tax helps fund programs like Social Security taxes and Medicare taxes. While full-time employees also pay taxes to support these programs, they split the 15.3% tax rate with employers as part of the Federal Insurance Contributions Act (FICA). Self-employed individuals are responsible for both the employer and employee portion of these taxes.