Self-employment tax covers Social Security and Medicare when you work for yourself

Self-employment tax is what you owe to Social Security and Medicare when you're self-employed. Unlike employees, who have these taxes withheld from paychecks, you calculate and pay them yourself. The rate is 15.3 percent of your net earnings — 12.4 percent for Social Security and 2.9 percent for Medicare — though you can deduct half of what you pay as a business expense on your tax return.

You owe self-employment tax if your net earnings from self-employment are $400 or more in a year. This applies whether you're a sole proprietor, a partner in a partnership, or an independent contractor. You pay it by filing Schedule SE (Self-Employment Tax) with your annual tax return, and you may also need to make quarterly estimated tax payments to the IRS if you expect to owe $1,000 or more.

Key Takeaways

  • Self-employment tax is 15.3 percent of your net self-employment income, split between Social Security (12.4 percent) and Medicare (2.9 percent).
  • You calculate what you owe using Schedule SE, which you file with your Form 1040 when you complete your annual tax return.
  • If you expect to owe $1,000 or more in total tax (income tax plus self-employment tax), you must make quarterly estimated payments on April 15, June 15, September 15, and January 15.
  • You can deduct half of your self-employment tax payment as a business expense, which lowers your taxable income.
  • Keeping records of all income and business expenses throughout the year makes calculating self-employment tax faster and more accurate.

Calculate your net self-employment income first

Before you can figure out how much self-employment tax you owe, you need to know your net self-employment income. This is your total self-employment income minus your business expenses. If you're a sole proprietor, you report this on Schedule C (Profit or Loss from Business). If you're a partner, your share comes from the partnership's Schedule K-1.

Net self-employment income is not the same as gross income. If you earned $50,000 but had $15,000 in legitimate business expenses — supplies, equipment, rent for a home office, vehicle mileage, professional services — your net income is $35,000. Self-employment tax is calculated on that $35,000, not the $50,000.

Keep receipts and records for every business expense you claim. The IRS asks for documentation if you're audited, and the difference between what you claim and what you can prove costs time and money.

Complete Schedule SE to find your self-employment tax

Schedule SE has two sections: Short Schedule SE and Long Schedule SE. Most self-employed people use the Short Schedule SE, which takes about five minutes to complete. You use it if your net self-employment income is less than $160,600 (this threshold changes yearly) and you have no other special circumstances.

On Schedule SE, you enter your net self-employment income from Schedule C or your K-1. The form then multiplies that by 92.35 percent — this accounts for the fact that you can deduct half of self-employment tax as a business expense — and applies the 15.3 percent rate. The result is your self-employment tax for the year.

You file Schedule SE with your Form 1040 and other tax documents when you file your annual return. The self-employment tax you calculate on Schedule SE is added to your income tax to determine your total tax bill for the year.

Make quarterly estimated tax payments if you owe $1,000 or more

If you expect your total tax bill for the year (income tax plus self-employment tax) to be $1,000 or more, you must make quarterly estimated tax payments. These are due on April 15, June 15, September 15, and January 15 of the following year. Paying quarterly keeps you from owing a large lump sum when you file your return and helps you avoid penalties for underpayment.

To calculate your quarterly payment, estimate your total tax for the year and divide by four. If your income is uneven — higher in some months than others — you can adjust each quarter's payment based on what you actually earned that quarter. The IRS provides Form 1040-ES, which walks you through the calculation and includes payment vouchers.

You can pay estimated taxes online through IRS Direct Pay, by phone, by mail using the vouchers from Form 1040-ES, or through an electronic federal tax payment system (EFTPS). Direct Pay and EFTPS are free. Paying by credit card or debit card through a third-party processor charges a fee.

Understand the deduction for half your self-employment tax

When you pay self-employment tax, you can deduct half of it on your Form 1040. This is not a business deduction — it appears on your individual tax return, not on Schedule C. The deduction lowers your adjusted gross income (AGI), which can reduce your tax bill and may affect other deductions or credits you claim.

The amount you deduct is calculated automatically on Schedule SE. You then transfer it to the line for self-employment tax deduction on Form 1040. You do not have to itemize deductions to claim it; it reduces your income whether you take the standard deduction or itemize.

Track income and expenses throughout the year

The easiest way to handle self-employment tax is to keep records as you go. Set up a straightforward system — a spreadsheet, accounting software like QuickBooks Self-Employed or Wave, or even a notebook — and record every payment you receive and every business expense you pay.

At the end of the year, add up your income and expenses. This gives you the net self-employment income you need for Schedule C and Schedule SE. If you wait until tax time to gather receipts and reconstruct the year, you will miss deductions, make mistakes, and spend hours sorting through documents.

Accounting software can generate reports that show your income and expenses by category, which makes filling out Schedule C and Schedule SE much faster. Many programs also calculate estimated tax payments for you and send reminders when they are due.

File your return and pay any remaining balance

When you file your annual tax return, you include Schedule SE along with your Form 1040 and Schedule C. The self-employment tax you calculated on Schedule SE is added to your income tax. If you made quarterly estimated payments, those are subtracted from your total tax bill. You then either owe the difference or receive a refund.

If you owe money, you can pay it with your return through IRS Direct Pay, EFTPS, or by check or money order mailed with your return. If you cannot pay the full amount, you can set up a payment plan with the IRS. Penalties and interest accrue on unpaid tax, so paying as soon as you can saves money.

File your return by April 15 unless you request an extension. An extension gives you until October 15 to file, but it does not extend the important date to pay tax. If you owe and do not pay by April 15, penalties and interest begin to accrue even if you file the extension.

Frequently Asked Questions

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

No. Self-employment tax is only owed on net self-employment income of $400 or more. If your business expenses exceed your income and you have a net loss, you do not owe self-employment tax. You still file Schedule C and Schedule SE to report the loss, which can reduce your overall tax bill.

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

You owe self-employment tax only on the self-employment income. However, if your W-2 wages already hit the Social Security wage base limit (which changes yearly), you may not owe the 12.4 percent Social Security portion of self-employment tax on some or all of your self-employment income. Schedule SE accounts for this automatically.

Can I pay self-employment tax monthly instead of quarterly?

The IRS requires quarterly payments, not monthly. However, you can pay more than the quarterly amount whenever you want. Some people pay monthly to spread out the burden, then reconcile the difference when they file their annual return.

What happens if I miss a quarterly payment important date?

You can still make the payment after the important date, but penalties and interest will accrue from the due date. The sooner you pay, the less interest you owe. If you miss multiple quarters, the IRS may contact you. Paying what you owe as soon as you realize you missed a important date is the best course.

Do I need to file Schedule SE if my self-employment income is under $400?

No. If your net self-employment income is less than $400, you do not owe self-employment tax and do not file Schedule SE. However, you still report the income on Schedule C if you are a sole proprietor, because it affects your overall tax situation.