Self-employment tax covers Social Security and Medicare when you're your own employer

Self-employment tax is the Social Security and Medicare tax you owe when you work for yourself. Unlike employees, who split these taxes with their employer, self-employed people pay the full amount — currently 15.3% of your net earnings (12.4% for Social Security, 2.9% for Medicare). You calculate it on Schedule SE, which feeds into your Form 1040 tax return.

The calculation starts with your net profit from self-employment — what you earned minus legitimate business expenses. You don't pay self-employment tax on your gross revenue. Once you know your net profit, you explore the 15.3% rate to a portion of it (not all of it, because of a deduction built into the formula). The result is what you owe, and you also get to deduct half of it from your income tax.

Most self-employed people file Schedule SE along with their 1040. If your net self-employment income is $400 or more in a year, you must file it. If it's under $400, you don't have to, though filing anyway can sometimes help you build Social Security credits.

Key Takeaways

  • Self-employment tax is 15.3% of your net self-employment income, split between Social Security (12.4%) and Medicare (2.9%).
  • You calculate net income by subtracting business expenses from what you earned, and you only pay self-employment tax on amounts of $400 or more per year.
  • Schedule SE is the form where you do the calculation, and it connects to your Form 1040 income tax return.
  • You can deduct half of your self-employment tax from your income tax, which lowers your overall tax bill.
  • If you have both W-2 wages and self-employment income, the calculation changes because W-2 wages already paid Social Security tax up to an annual cap.

The difference between gross income and net self-employment income

Self-employment tax is based on net income, not the total money you brought in. Net income is what's left after you subtract legitimate business expenses. This is the same income figure you report on Schedule C (Profit or Loss from Business), which is where you list your revenue and deductions.

Common business expenses include supplies, equipment, rent for a workspace, vehicle mileage, professional services, and insurance. The IRS allows you to deduct ordinary and necessary expenses — things that are standard in your line of work and that you actually spent money on. Keep receipts and records to back up what you claim.

If you earned $50,000 in revenue but spent $15,000 on legitimate business expenses, your net self-employment income is $35,000. That's the number you use to calculate self-employment tax, not the $50,000.

How to fill out Schedule SE step by step

Schedule SE has two versions: the short form (SE-Short) and the long form (SE-Long). Most self-employed people use the short form if they have only one business and their net profit is under $160,600 (this threshold changes yearly). The long form is for people with multiple businesses, certain farm income, or higher earnings.

On the short form, you start by entering your net profit from Schedule C, line 31. Then you multiply that by 92.35% — this adjustment accounts for the fact that you can deduct half of your self-employment tax, so the IRS lets you calculate on a slightly smaller base. The result is your "net earnings from self-employment." Multiply that by 15.3% to get your self-employment tax.

The form then calculates how much of that tax is Social Security (capped at a certain wage base, which changes yearly) and how much is Medicare (no cap). The final number goes on your Form 1040, and you also get to deduct half of it as an adjustment to income.

If you use tax software, it usually fills Schedule SE for you once you enter your Schedule C information. If you file by hand, the IRS provides detailed instructions with the form itself.

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

Social Security tax has an annual wage base limit — a maximum amount of earnings subject to the 12.4% rate. For 2024, that limit is $168,600 (this changes yearly based on wage growth). Medicare tax, by contrast, has no cap: you pay 2.9% on all your net self-employment income, no matter how high it goes.

This means if your net self-employment income is $200,000, you pay the full 12.4% Social Security tax only on the first $168,600 of it. On the remaining $31,400, you pay only the 2.9% Medicare tax. The wage base limit is built into Schedule SE's calculation, so the form handles it automatically — you don't have to do it by hand.

If you also have W-2 wages from an employer, those wages count toward the Social Security cap too. Schedule SE asks whether you had W-2 wages, and if you did, it adjusts the calculation so you don't pay Social Security tax twice on the same earnings.

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

If you worked as an employee for part of the year and were self-employed for part of it — or worked two jobs — you have both W-2 wages and self-employment income. Your employer already withheld Social Security and Medicare tax from your W-2 wages. Schedule SE needs to know this so it doesn't make you pay Social Security tax on more than the annual cap.

On Schedule SE, there's a line asking for your W-2 wages subject to Social Security tax. Enter the amount from box 3 of your W-2 form (or the total if you have multiple W-2s). The form then reduces the Social Security portion of your self-employment tax so that your total Social Security tax — from both W-2 and self-employment — doesn't exceed the cap.

Your Medicare tax, however, has no cap and no coordination with W-2 wages. You pay 2.9% on all your net self-employment income, plus you pay 2.9% on all your W-2 wages (your employer pays the other 2.9%). If your total income exceeds $200,000 (single) or $250,000 (married filing jointly), you also owe an additional 0.9% Medicare tax on the excess.

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

Once you calculate your self-employment tax on Schedule SE, you get to deduct half of it from your income. This deduction appears on Form 1040 as "self-employment tax deduction" and reduces your taxable income for income tax purposes.

This deduction exists because employees don't pay the employer's share of Social Security and Medicare tax — their employer does. Self-employed people pay both shares, so the deduction levels the playing field. If you owed $3,000 in self-employment tax, you can deduct $1,500 from your income tax calculation.

The deduction is separate from self-employment tax itself. You still owe the full self-employment tax amount, but you get a break on your income tax. This is why self-employment tax and income tax are two different bills — they're calculated differently and serve different purposes.

Estimated tax payments and when you need to make them

If you expect to owe $1,000 or more in self-employment tax and income tax combined for the year, you generally need to make quarterly estimated tax payments. These are payments you make directly to the IRS four times a year, rather than waiting until you file your return.

Estimated payments are due on April 15, June 15, September 15, and January 15 (the January payment is for the previous year). You calculate each quarter's payment based on what you expect to earn that quarter, though many self-employed people straightforward divide their previous year's tax bill by four and pay that amount each quarter.

If you don't make estimated payments and you owe a large amount when you file, the IRS charges interest and penalties. However, if you paid enough through withholding or estimated payments, you won't face penalties even if you owed a little extra. You can make estimated payments online through IRS Direct Pay or by mail using Form 1040-ES.

Frequently Asked Questions

Do I have to pay self-employment tax if I made less than $400?

No. Self-employment tax is only required if your net self-employment income is $400 or more in a year. If you earned less than that, you don't have to file Schedule SE. However, filing anyway can help you build Social Security credits, so some people choose to file even with lower earnings.

Can I deduct business expenses to get below the $400 threshold?

Yes. The $400 threshold applies to net income after expenses, not gross revenue. If you earned $600 in revenue but had $250 in legitimate business expenses, your net income is $350, and you wouldn't owe self-employment tax. Keep records of all expenses you claim.

What if I'm a contractor and my client sent me a 1099 form?

A 1099-NEC or 1099-MISC means the IRS knows about your income because your client reported it. You still calculate self-employment tax the same way: take your net income (after business expenses) and file Schedule SE. The 1099 doesn't change the calculation, but it does mean the IRS is tracking that income.

Do I pay self-employment tax on business losses?

No. If your business expenses exceed your revenue in a year, you have a loss, not income. You don't owe self-employment tax on a loss. You can carry the loss forward to reduce self-employment tax in future years when you have income, though the rules for this are complex and depend on your business structure.

How do I know if I should use the short form or long form of Schedule SE?

Use the short form if you have one business, your net profit is under $160,600, and you're not a farmer or minister. Use the long form if you have multiple businesses, farm income, or higher earnings. Tax software will choose the right form for you based on your information.