Self-employment tax is 15.3% of your net earnings, split between Social Security and Medicare

If you work for yourself — as a freelancer, contractor, consultant, or small business owner — you pay self-employment tax in addition to income tax. The rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare. You calculate it on your net profit (revenue minus business expenses), not your gross income.

The catch is that you pay both the employee and employer portions. A W-2 employee's employer covers half the payroll tax; you cover all of it. You do get a deduction for the employer-equivalent half when you file, which reduces your taxable income, but you still write the full check.

The Social Security portion (12.4%) applies only to earnings up to a cap. For 2024, that cap is $168,600 of net self-employment income. Once you exceed it, you stop paying the 12.4% on additional dollars. Medicare (2.9%) has no cap, and high earners pay an extra 0.9% Medicare tax on top of that.

Key Takeaways

  • Self-employment tax is 15.3% of your net profit (after business expenses), calculated on Schedule SE and paid with your income tax return.
  • You can deduct half of your self-employment tax when calculating your adjusted gross income, which lowers your overall tax bill.
  • The Social Security portion stops at $168,600 of net earnings in 2024, but Medicare tax continues on all income above that.
  • If you expect to owe more than $1,000 in self-employment tax, you should make quarterly estimated tax payments to avoid penalties.
  • Sole proprietors, partners, and S-corp shareholders all owe self-employment tax, but the calculation differs slightly for S-corp owners.

How to calculate what you owe

Start with your net profit from Schedule C (Profit or Loss from Business). This is your revenue minus all legitimate business expenses: supplies, equipment, rent, utilities, insurance, professional fees, and so on. You do not deduct personal expenses or your own salary.

Multiply that net profit by 92.35% — this accounts for the fact that you can deduct half of your self-employment tax. The result is your net self-employment income. Multiply that by 15.3% to find your self-employment tax.

You report this on Schedule SE (Self-Employment Tax), which comes with Form 1040. The IRS form walks you through the math step by step. If your net profit is under $400, you do not owe self-employment tax at all, though you may still owe income tax.

Quarterly estimated payments and penalties

Self-employment tax is due when you file your return, but if you expect to owe $1,000 or more, the IRS wants you to pay in four quarterly installments instead. These are due April 15, June 15, September 15, and January 15 of the following year.

If you do not pay quarterly and owe a large amount at tax time, you face an underpayment penalty — a small interest charge on the amount you should have paid earlier. The penalty is not severe, but it is avoidable. You can use Form 1040-ES to calculate your quarterly payment, or use the IRS worksheet on their website.

If your income is uneven — high some months, low others — you can base each quarterly payment on the income you actually earned in that quarter, rather than dividing the year evenly. This can reduce or eliminate the penalty if you paid less early in the year but caught up later.

The deduction for half your self-employment tax

When you file your return, you deduct half of your self-employment tax on the front of Form 1040, before you calculate your adjusted gross income. This is not a business deduction; it is a personal deduction that applies to all self-employed people.

If your self-employment tax is $3,000, you deduct $1,500. This reduces your taxable income and lowers your income tax bill. The deduction does not reduce your self-employment tax itself — you still owe the full 15.3% — but it prevents you from paying income tax on the portion that covers the employer-side payroll tax.

Self-employment tax for S-corp owners

If you own an S-corporation, the rules are different. An S-corp is a business structure that files its own tax return (Form 1120-S) and passes profits to you on a K-1. You pay self-employment tax only on the portion of your S-corp income that counts as wages.

The IRS requires S-corp owners to pay themselves a "reasonable salary" for the work they do. You pay payroll tax (Social Security and Medicare) on that salary, just like an employee would. The remaining profit — distributions — is not subject to self-employment tax.

This can save you money if your S-corp is profitable, because you avoid the 15.3% tax on distributions. However, the IRS watches for owners who pay themselves a token salary and take most of their income as distributions. If audited, the IRS can reclassify distributions as wages and assess back taxes and penalties. A reasonable salary is one that matches what you would earn doing the same work for someone else.

State self-employment tax

Federal self-employment tax is the same everywhere, but some states also tax self-employment income. California, New Jersey, and a handful of others have state income tax that applies to self-employed people just as it does to W-2 employees. A few states have no income tax at all.

Check your state's tax agency website to see whether you owe state tax on self-employment income and at what rate. State tax is separate from federal self-employment tax and is calculated on your state return, not on Schedule SE.

When to talk to a tax professional

If you have a straightforward freelance business with straightforward expenses, you can calculate self-employment tax yourself using Schedule SE and Form 1040-ES. But if you have multiple income streams, employees, or are considering an S-corp structure, a tax professional can show you whether restructuring would save money.

An accountant or tax preparer can also help you track expenses throughout the year so you do not miss deductions, and can advise on whether you should make quarterly payments or adjust your withholding. The cost of professional help often pays for itself in tax savings and peace of mind.

Frequently Asked Questions

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

No. Self-employment tax is calculated on net profit. If your business expenses exceed your revenue, you have a loss and owe no self-employment tax. You may still owe income tax if you have other income, but the loss can offset that.

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

Yes. Home office expenses reduce your net profit on Schedule C, which lowers both your income tax and your self-employment tax. You can use the simplified method (a flat rate per square foot) or actual expenses. Either way, the deduction flows through to your self-employment tax calculation.

What if I have a job and also freelance on the side?

You owe self-employment tax on your freelance profit, separate from your W-2 job. Your W-2 employer withholds payroll tax from your paycheck. You calculate self-employment tax on your freelance income and pay it with your return or through quarterly payments. You may owe estimated tax if your total tax liability is high enough.

Does the self-employment tax deduction reduce my self-employment tax?

No. The deduction reduces your income tax, not your self-employment tax. You still owe the full 15.3% on your net earnings. The deduction straightforward prevents you from paying income tax on the employer-side portion of the payroll tax you already paid.

What happens if I do not pay quarterly estimated taxes?

You can pay the full amount when you file your return without penalty, as long as you file on time. If you owe more than $1,000 and do not pay quarterly, you may face a small underpayment penalty, but it is usually modest. Paying quarterly avoids the penalty and spreads the cost across the year.