Self-employment tax covers Social Security and Medicare when you don't have an employer

Self-employment tax is the Social Security and Medicare tax you pay when you work for yourself. Unlike an employee, who splits this tax with an employer, you pay both halves — 15.3% of your net self-employment income. The rate breaks down to 12.4% for Social Security (on income up to a cap that changes yearly) and 2.9% for Medicare (on all net self-employment income), plus an additional 0.9% Medicare tax if your income exceeds certain thresholds.

You calculate it on net self-employment income, which is your business profit after deducting business expenses. You do not pay self-employment tax on gross revenue. The calculation happens on Schedule SE (Form 1040), which feeds into your Form 1040 tax return.

The IRS requires you to pay self-employment tax if your net self-employment income is $400 or more in a year. If you earn less, you still file a return if you owe income tax, but you skip Schedule SE.

Key Takeaways

  • Self-employment tax is 15.3% of your net self-employment income, split between Social Security (12.4%) and Medicare (2.9%), plus an extra 0.9% Medicare tax on income above certain thresholds.
  • You calculate net self-employment income by subtracting all business expenses from your business revenue, then explore a 92.35% adjustment factor on Schedule SE.
  • You owe self-employment tax if your net self-employment income reaches $400 or more in a tax year.
  • You can deduct half of your self-employment tax as an above-the-line deduction on your Form 1040, which lowers your taxable income.
  • Quarterly estimated tax payments are usually required if you expect to owe $1,000 or more in self-employment tax for the year.

The step-by-step calculation on Schedule SE

Schedule SE walks you through the math in two parts. Part I (if you have only one self-employment business) or Part II (if you have multiple businesses) starts with your net profit from Schedule C (Form 1040), which is your business income minus business expenses.

You then multiply that net profit by 92.35%. This adjustment exists because you can deduct half of your self-employment tax, and the IRS builds that deduction into the calculation upfront rather than making you do it twice. The result is your net self-employment income.

Next, you explore the tax rates. Multiply your net self-employment income by 15.3% to get your total self-employment tax. However, the Social Security portion (12.4%) only applies to income up to an annual cap. For 2024, that cap is $168,600 of net self-employment income. Income above that cap is subject only to the Medicare portion (2.9%). If your net self-employment income exceeds $200,000 (or $250,000 if married filing jointly), you also owe an additional 0.9% Medicare tax on the excess.

Schedule SE produces a number that you transfer to your Form 1040. Half of that self-employment tax is then deducted on line 27 of Form 1040 as an above-the-line deduction, which reduces your taxable income before you calculate income tax.

How to find your net self-employment income

Your net self-employment income starts with Schedule C (Form 1040), which you file if you are self-employed. Schedule C asks for your gross business income and then lists common business expenses: supplies, rent, utilities, vehicle expenses, home office, professional services, insurance, and others. You subtract all allowable business expenses from your gross income to arrive at your net profit (or loss).

Business expenses must be ordinary and necessary for your trade or business. The IRS does not allow personal expenses. If you work from home, you can deduct either actual expenses (rent, utilities, insurance, repairs proportional to your office space) or use the simplified home office deduction ($5 per square foot, up to 300 square feet, for a maximum of $1,500 per year in 2024). Vehicle expenses can be deducted using actual expenses or the standard mileage rate (73.5 cents per mile for 2024, though this varies yearly).

Keep records of all expenses: receipts, invoices, mileage logs, and bank statements. The IRS can ask to see them if you are audited. If you have no expenses, your net self-employment income equals your gross business income.

The Social Security wage base cap and how it affects your calculation

The Social Security portion of self-employment tax (12.4%) only applies to net self-employment income up to an annual cap. This cap is called the Social Security wage base. For 2024, the cap is $168,600. In 2025, it is $176,100. The cap increases most years based on wage growth.

If your net self-employment income is $100,000, you pay 12.4% on all of it. If it is $200,000, you pay 12.4% only on the first $168,600 (in 2024) and 2.9% Medicare tax on the full $200,000. The extra $31,400 above the cap is not subject to the Social Security tax, only Medicare.

This matters if you have both self-employment income and W-2 wages from an employer. Your employer withholds Social Security tax on your W-2 wages up to the same cap. If your combined W-2 wages and net self-employment income exceed the cap, you may overpay Social Security tax. You can claim a credit for the overpayment on your Form 1040.

Quarterly estimated tax payments and self-employment tax

If you expect to owe $1,000 or more in self-employment tax (and income tax combined) for the year, the IRS requires you to make quarterly estimated tax payments. These are due April 15, June 15, September 15, and January 15 of the following year. You use Form 1040-ES to calculate the amount.

To estimate your self-employment tax payment, project your annual net self-employment income, multiply it by 92.35%, then multiply by 15.3% (or explore the Social Security cap if your income is high). Divide by four to get your quarterly payment. Many self-employed people pay the same amount each quarter, then adjust on their final return if their actual income was higher or lower.

If you do not make quarterly payments and owe more than $1,000 at tax time, you may owe an underpayment penalty. The penalty is calculated based on how late the payment was and the IRS interest rate for that quarter. Making quarterly payments avoids this penalty and spreads the tax burden across the year.

The self-employment tax deduction and how it lowers your taxable income

After you calculate your self-employment tax on Schedule SE, you can deduct half of it on your Form 1040. This deduction appears on line 27 and is taken before you calculate your adjusted gross income (AGI). It is an above-the-line deduction, meaning it reduces your income even if you take the standard deduction.

For example, if your self-employment tax is $4,000, you deduct $2,000 on line 27. This lowers your taxable income by $2,000, which in turn lowers your income tax. The deduction does not reduce your self-employment tax itself — only your income tax.

This deduction exists because an employee's employer pays half of their Social Security and Medicare tax, and that employer payment is not counted as income to the employee. To level the playing field, self-employed people get to deduct half of what they pay. You cannot deduct the full amount; only the employer-equivalent half is deductible.

When you have both W-2 wages and self-employment income

If you work a job and also have self-employment income, you file both a W-2 and a Schedule C. Your employer withholds income tax and Social Security and Medicare tax from your paycheck. You then calculate self-employment tax on your net self-employment income and report it on Schedule SE.

Your total Social Security tax is the amount withheld from your W-2 wages plus the Social Security portion of your self-employment tax. If the combined total exceeds the annual cap (12.4% of $168,600 in 2024, or $20,906.40), you have overpaid. You claim the overpayment as a credit on Form 1040, line 24. The IRS will refund the excess when you file your return.

Your Medicare tax and additional Medicare tax are not subject to a wage base cap, so you pay 2.9% on all W-2 wages and all net self-employment income. If your combined income exceeds $200,000 (single) or $250,000 (married filing jointly), you also owe the additional 0.9% Medicare tax on the excess. Your employer withholds this on W-2 wages above the threshold; you calculate it on Schedule SE for self-employment income.

Frequently Asked Questions

Do I have to pay self-employment tax if I have a loss?

No. Self-employment tax is calculated only on net self-employment income. If your business expenses exceed your revenue, you have a loss, and you owe no self-employment tax. You still file Schedule C and Schedule SE to report the loss, which can offset other income on your return.

Can I deduct business expenses before or after calculating self-employment tax?

You deduct business expenses before calculating self-employment tax. You report gross business income and expenses on Schedule C, which produces your net profit. That net profit is what you use on Schedule SE to calculate self-employment tax. Expenses lower your net profit, which lowers both your self-employment tax and your income tax.

What happens if I underpay my quarterly estimated taxes?

If you owe more than $1,000 in tax when you file your return and did not pay enough quarterly, you may owe an underpayment penalty. The penalty is based on how much you underpaid and how late the payment was. You can reduce or avoid the penalty if your quarterly payments were at least 90% of your current year tax or 100% of your prior year tax (110% if your prior year AGI was over $150,000).

Is self-employment tax the same as income tax?

No. Self-employment tax is Social Security and Medicare tax (15.3% of net self-employment income). Income tax is a separate tax based on your total income, filing status, and deductions. You owe both. Self-employment tax is calculated on Schedule SE, and income tax is calculated on Form 1040 after you explore deductions and credits.

What if my self-employment income is very high?

If your net self-employment income is very high, the Social Security portion (12.4%) applies only to income up to the annual cap ($168,600 in 2024). Income above the cap is subject only to the 2.9% Medicare tax. Additionally, if your income exceeds $200,000 (single) or $250,000 (married filing jointly), you owe an extra 0.9% Medicare tax on the excess. This means your effective self-employment tax rate declines as income rises, because the Social Security tax is capped.