When you’re self-employed and starting your own business, there are some key housekeeping matters to attend to: implementing a strategic business plan, finding reputable business accounting tools, and preparing to pay self-employment taxes. Whether you have a part-time side hustle, full-time freelance work, or a thriving small business, taxes are a regular part of managing your enterprise.
Without an employer automatically withholding taxes from your paycheck, it’s up to you as a business owner 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 additional category to consider: self-employment taxes. Here’s what you need to know about self-employment taxes and how to calculate them.
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 and Medicare taxes, these costs are shared 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 earning $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 2023, self-employed individuals owe 12.4% for Social Security on their first $160,200 of net earnings. If you make more than $160,200 in a year, the rest of your earnings are not taxed for Social Security.
How to calculate Medicare tax
As of 2023, self-employed individuals pay 2.9% for Medicare on their total net earnings. If the amount you earn is more than $200,000, (or, $250,000 if married and filing jointly; $125,000 married filing separately), then expect to pay an additional 0.9% in Medicare taxes.
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 them to the government on their behalf. For self-employed individuals, however, filing small business taxes is 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. When filing annual tax returns, you will use Schedule SE (Form 1040) to report your self-employment taxes.
When to pay estimated taxes
The quarterly deadlines to pay estimated taxes are typically 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 owe an underpayment penalty fee when you file your annual 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 (7% as of July 1, 2023).
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 typically 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% of what you owed the previous tax year (broken out into quarterly payments), you typically will not face a penalty fee—even if you actually end up owing more than you paid. And, if you owe less, you receive a tax refund.
Tax deductions for self-employed people
Self-employment tax often takes people by surprise when they start working for themselves because it’s more than they’re used to paying for Social Security and Medicare taxes. The good news: Although you are 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 serves as a deduction:
Deduct employer equivalent of FICA taxes
When calculating how much self-employment tax you owe, you can reduce your net earnings by half of the self-employment tax before applying the tax rate. For example, if you earn $100,000, you theoretically would owe $15,300 (15.3%) in self-employment tax. However, self-employed individuals are allowed to deduct 50% 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).
Claim 50% of what you pay in self-employment taxes
By doing so, you can claim it as a self-employment tax deduction on your income. In the above example, you could deduct $7,064.76 from your taxable income.
Business tax deductions
- Advertising and marketing costs
- Bank fees
- Business travel
- Mobile phone and internet costs
- Continuing 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). These include:
- Charitable donations
- Medical expenses
- Mortgage interest
- Retirement contributions
- Student loan interest
Paying self-employment taxes as a small business owner
As a self-employed individual with a small business, you are responsible for paying self-employment taxes for Social Security and Medicare at a tax rate of 15.3%. Even if your fledgling business has earned as little as $400, you can typically expect to pay this type of business tax. Calculating the correct amount to avoid underpayment and potential penalties, understanding the frequency of payments, and tracking your business expenses and revenue can help you in planning—and paying—your self-employment tax.
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 from your income, 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 and Medicare. 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 portions of the tax.