Self-employment tax covers Social Security and Medicare for people who work for themselves

Self-employment tax is a flat 15.3% of your net business income. This breaks down to 12.4% for Social Security and 2.9% for Medicare. You pay both the employer and employee portions because you are both — there is no employer to split the cost with you.

The Social Security portion (12.4%) only applies to the first $168,600 of net self-employment income in 2024. Once you exceed that threshold, you stop paying the 12.4% on additional income. The Medicare portion (2.9%) has no income cap, and an additional 0.9% Medicare tax applies to net self-employment income above $200,000 (single filers) or $250,000 (married filing jointly).

You owe self-employment tax if your net business income is $400 or more in a year. This applies whether you are a sole proprietor, partner in a partnership, or member of an LLC taxed as a sole proprietorship or partnership. S-corporation owners and W-2 employees do not pay self-employment tax on their business income.

Key Takeaways

  • Self-employment tax is 15.3% of net business income, split between Social Security (12.4%) and Medicare (2.9%), and you owe it when net income reaches $400 or more.
  • You can deduct half of your self-employment tax from your adjusted gross income, which lowers your overall tax bill.
  • Quarterly estimated tax payments are usually required if you expect to owe $1,000 or more in self-employment tax for the year.
  • Net business income is your gross revenue minus business expenses, not your gross revenue alone.
  • An S-corporation election can reduce self-employment tax by allowing you to pay yourself a reasonable salary and take the rest as a distribution, though it requires more paperwork and accounting.

How to calculate your self-employment tax

Start with your net business income — the amount on Schedule C (Form 1040) or Schedule K-1 if you are in a partnership or LLC. This is your gross revenue minus all ordinary business expenses: supplies, rent, utilities, equipment, professional services, and so on.

Multiply your net business income by 92.35% (this accounts for the employer portion deduction built into the calculation). Then multiply that result by 15.3%. The number you get is your self-employment tax.

Example: You have $60,000 in net business income. Multiply $60,000 × 0.9235 = $55,410. Then $55,410 × 0.153 = $8,478 in self-employment tax. You report this on Schedule SE (Form 1040) and transfer it to your Form 1040.

The self-employment tax deduction reduces your income tax

You can deduct half of your self-employment tax from your adjusted gross income. Using the example above, you would deduct $8,478 ÷ 2 = $4,239. This deduction lowers the income you pay federal income tax on, but it does not lower the self-employment tax itself.

This deduction appears on Form 1040 as a line item and flows into your adjusted gross income calculation. It is one of the few deductions available to self-employed people without itemizing.

Quarterly estimated tax payments and self-employment tax

If you expect to owe $1,000 or more in federal income tax and self-employment tax combined for the year, you must make quarterly estimated tax payments. These are due April 15, June 15, September 15, and January 15 of the following year.

To estimate your quarterly payment, project your annual net business income, calculate what you expect to owe in self-employment tax and income tax, subtract any tax credits, and divide by four. If your income is uneven across the year, you can pay more in quarters when you earn more and less when you earn less.

Underpayment penalties explore if you pay too little throughout the year, even if you end up owing nothing when you file. The penalty is based on the IRS underpayment rate, which changes quarterly. Paying quarterly also spreads your tax burden across the year rather than creating a large bill in April.

When an S-corporation election might lower your self-employment tax

If your net business income is substantial, electing to be taxed as an S-corporation can reduce self-employment tax. Here is how: as an S-corp owner, you pay yourself a reasonable salary as a W-2 employee. You pay payroll taxes (Social Security and Medicare) on that salary, but not on distributions you take from the business above your salary.

The catch is that your salary must be reasonable for the work you do. The IRS scrutinizes S-corp owners who pay themselves $30,000 in salary and take $200,000 in distributions when comparable business owners earn $150,000. If audited, you could owe back taxes, penalties, and interest.

An S-corp election also requires filing Form 2553 with the IRS, setting up payroll (either yourself or through a payroll service), filing quarterly payroll tax returns, and issuing yourself a W-2 at year-end. The accounting and compliance costs typically run $1,500 to $3,000 per year. This strategy makes sense only if your net business income is high enough that the tax savings exceed those costs — usually $60,000 or more.

Self-employment tax and retirement account contributions

Self-employed people can contribute to a Solo 401(k) or SEP-IRA to reduce taxable income. These contributions lower your income tax but do not lower your self-employment tax. However, the income reduction does lower the income base on which you calculate self-employment tax in future years if your business income fluctuates.

A Solo 401(k) allows you to contribute up to $69,000 in 2024 (including both employee deferrals and employer contributions). A SEP-IRA allows you to contribute up to 25% of your net self-employment income (after the self-employment tax deduction). Both reduce your taxable income dollar-for-dollar and can significantly lower your overall tax bill.

State self-employment tax and local obligations

Federal self-employment tax is the only self-employment tax. However, some states impose additional taxes on self-employed income or business income. California, for example, has a 1.5% tax on business income over $250,000. New York City has a self-employment income tax of 3.876% on net earnings above certain thresholds.

Check your state and local tax authority websites to learn whether you owe additional taxes. These are separate from federal self-employment tax and are reported on your state return, not your federal return.

Frequently Asked Questions

Do I owe self-employment tax if I have a loss?

No. Self-employment tax is calculated on net profit only. If your business expenses exceed your revenue, you have a loss and owe no self-employment tax. You can carry the loss forward to offset future years' income.

Can I deduct home office expenses to lower self-employment tax?

Yes. Home office expenses reduce your net business income, which lowers the amount subject to self-employment tax. You can use either the simplified method ($5 per square foot, up to 300 square feet) or actual expense method. Both lower your self-employment tax calculation.

What if I have both W-2 income and self-employment income?

You pay self-employment tax only on the self-employment income. However, if your W-2 wages already hit the Social Security wage cap ($168,600 in 2024), you do not pay the 12.4% Social Security portion on self-employment income — only the 2.9% Medicare portion.

Do I have to pay self-employment tax if I am retired but still have a side business?

Yes, if your net business income is $400 or more. Age does not exempt you from self-employment tax. However, you can still contribute to a Solo 401(k) or SEP-IRA to reduce your taxable income, and you may be able to claim the Earned Income Tax Credit if your income is low enough.

What happens if I do not pay estimated taxes?

The IRS charges an underpayment penalty based on the quarterly federal rate, compounded daily. The penalty applies even if you end up with a refund when you file. Paying quarterly avoids the penalty and spreads your tax burden across the year.