Self-employment tax is the Social Security and Medicare tax you pay when you work for yourself

When you work as an employee, your employer withholds Social Security and Medicare tax from your paycheck — together called FICA. Your employer also pays an equal amount on your behalf. When you work for yourself — as a freelancer, contractor, consultant, or business owner — there is no employer to split the cost. You pay both halves yourself, and that combined payment is called self-employment tax.

Self-employment tax funds the same Social Security retirement and disability benefits, and the same Medicare health insurance, that employee FICA funds. The difference is purely who writes the check. An employee pays 7.65% and their employer pays 7.65%. A self-employed person pays 15.3% out of pocket. You also deduct half of what you pay as a business expense on your tax return, which lowers your ordinary income tax — but you still owe the full 15.3% to Social Security and Medicare.

You owe self-employment tax if your net self-employment income — what you earn minus legitimate business expenses — is $400 or more in a year. You report it on Schedule SE, a form you file with your 1040 tax return. The amount you owe is separate from your ordinary income tax and is calculated independently.

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 additional 0.9% Medicare tax if you earn over a threshold amount.
  • You owe self-employment tax on net income of $400 or more per year, even if you have no other tax liability.
  • You report self-employment tax on Schedule SE and file it with your Form 1040; the IRS calculates the amount you owe based on your net profit.
  • You can deduct half of your self-employment tax as a business expense, which reduces your ordinary income tax but does not reduce the self-employment tax itself.
  • Self-employment tax builds the same Social Security credits and Medicare coverage as employee FICA, so the benefits you receive later are the same.

How self-employment tax differs from ordinary income tax

Ordinary income tax is what most people think of as "taxes owed." It is a percentage of your income that varies based on your tax bracket, and it funds general government operations. Self-employment tax is separate: it is a flat 15.3% that goes directly to Social Security and Medicare, regardless of your bracket.

You can owe self-employment tax even if you owe no ordinary income tax. For example, if you are a single filer with $8,000 in net self-employment income and no other income, you owe roughly $1,130 in self-employment tax but zero ordinary income tax, because the standard deduction covers your income. Conversely, you can owe ordinary income tax without owing self-employment tax — for instance, if you have W-2 wages and investment income but no self-employment income.

The two taxes are calculated on different forms. Ordinary income tax is calculated on your 1040. Self-employment tax is calculated on Schedule SE, then the result is transferred to your 1040 and added to your ordinary tax bill. They are independent obligations.

The two parts of self-employment tax and the income thresholds

Self-employment tax has two components. The first is the Social Security portion, which is 12.4% of your net self-employment income, up to a maximum income threshold. In 2024, that threshold is $168,600 — meaning you pay 12.4% on the first $168,600 of net self-employment income, and nothing on income above that. This threshold changes each year based on wage growth.

The second component is the Medicare portion, which is 2.9% of all your net self-employment income, with no upper limit. If you earn $500,000 in self-employment income, you pay 2.9% Medicare tax on the full $500,000. Additionally, if your total income (wages plus self-employment income) exceeds $200,000 as a single filer or $250,000 as a married couple filing jointly, you owe an extra 0.9% Medicare tax on the excess. This additional Medicare tax was introduced in 2013 and applies to both employees and self-employed people.

Together, the base rates are 15.3%: 12.4% for Social Security plus 2.9% for Medicare. If you cross the additional Medicare threshold, you pay 16.2% on income above that threshold.

What counts as self-employment income

Self-employment income is the net profit from a trade or business you operate. It includes income from freelance work, consulting, contracting, a sole proprietorship, a partnership, or an S-corporation (though S-corp rules are more complex). It does not include W-2 wages from an employer, rental income, investment income, or Social Security benefits.

To calculate your net self-employment income, you start with your gross revenue and subtract legitimate business expenses: supplies, equipment, rent for a business space, professional fees, vehicle expenses if they are business-related, and other ordinary costs of running the business. You report this on Schedule C (Profit or Loss from Business) if you are a sole proprietor, or on the appropriate partnership or S-corp return if you operate in another structure.

The net profit from Schedule C is what you use to calculate self-employment tax on Schedule SE. If you have a loss — expenses exceed revenue — you owe no self-employment tax for that year, though you may be able to carry the loss forward to offset future income.

How to report and pay self-employment tax

You report self-employment tax by completing Schedule SE and attaching it to your Form 1040. Schedule SE has two sections: the short form (Section A) for most people, and the long form (Section B) for people with more complex situations, such as those with multiple businesses or who are members of a partnership.

On Schedule SE, you enter your net self-employment income from Schedule C (or the equivalent from your business return). The form then calculates your self-employment tax using the current rates. You transfer the result to your 1040, where it is added to your ordinary income tax to determine your total tax bill.

If you owe self-employment tax, you pay it the same way you pay ordinary income tax: through quarterly estimated tax payments if you expect to owe $1,000 or more, or in full when you file your return. The IRS does not send you a bill for self-employment tax separately; it is part of your overall tax liability.

The deduction for half your self-employment tax

Although you pay the full 15.3% self-employment tax, you can deduct half of it as a business expense on your 1040. This deduction lowers your adjusted gross income (AGI), which in turn lowers your ordinary income tax.

For example, if you owe $1,530 in self-employment tax, you can deduct $765 as a business expense. If you are in the 22% tax bracket, that $765 deduction saves you about $168 in ordinary income tax. You still owe the full $1,530 in self-employment tax, but your ordinary income tax bill is reduced.

This deduction is automatic — you do not have to itemize or meet any threshold to claim it. The IRS calculates it for you on your 1040 based on the self-employment tax you report on Schedule SE. It is one of the few ways the tax code acknowledges that self-employed people pay both the employee and employer share.

Self-employment tax and Social Security credits

Self-employment tax you pay builds Social Security credits the same way employee FICA does. You earn one credit for each $1,640 of net self-employment income in 2024 (this amount changes yearly). You can earn up to four credits per year. To be may be able to access for Social Security retirement benefits, you need 40 credits total, which typically takes about 10 years of work.

Because self-employment tax funds the same Social Security system as employee FICA, the retirement and disability benefits you eventually receive are calculated the same way, regardless of whether you were self-employed or an employee. Your benefit is based on your highest 35 years of earnings, and self-employment income counts toward that calculation just as W-2 wages do.

Frequently Asked Questions

Do I owe self-employment tax if I have a side business and a regular job?

Yes. Self-employment tax is owed on net self-employment income regardless of whether you also have W-2 wages. Your W-2 wages do not reduce the self-employment tax you owe on your side business income. However, the Social Security portion of self-employment tax is capped at the annual threshold, so if your W-2 wages already hit that cap, you may owe less self-employment tax on your business income.

What if my business has a loss?

If your business expenses exceed your revenue, you have a loss and owe no self-employment tax for that year. You can carry the loss forward to offset self-employment income in future years. You still file Schedule C and Schedule SE to report the loss, as it may reduce your ordinary income tax.

Can I reduce my self-employment tax by paying myself a salary instead of taking a draw?

If you operate as an S-corporation, you can pay yourself a reasonable W-2 salary and take the remainder as a distribution, which avoids self-employment tax on the distribution portion. However, the IRS requires the salary to be reasonable for the work you do, and this strategy involves more complex tax filing. For sole proprietors and partnerships, all net income is subject to self-employment tax.

Do I have to make quarterly estimated tax payments if I owe self-employment tax?

You must make quarterly estimated tax payments if you expect to owe $1,000 or more in total tax (ordinary income tax plus self-employment tax) for the year. Estimated payments are due April 15, June 15, September 15, and January 15. If you do not pay quarterly, you may owe a penalty when you file your return.

Does self-employment tax count toward Medicare may be able to access?

Self-employment tax funds Medicare the same way employee FICA does. You become may be able to access for Medicare at age 65 based on your work history, regardless of whether you were self-employed or an employee. Self-employment income counts toward the 40 credits needed for Medicare may be able to access.