Self-Employment Tax Explained in Simple Terms
If you’re a freelancer, side hustler, or small business owner, self-employment tax is probably on your radar—but what exactly is it, and how does it affect your tax bill?
In simple terms, self-employment tax is how you pay into Social Security and Medicare when you work for yourself. While W-2 employees have these taxes automatically withheld and split with their employer, self-employed individuals are responsible for paying the full amount.
How Much Is Self-Employment Tax?
The total self-employment tax rate is 15.3% of your net earnings. It breaks down like this:
12.4% for Social Security
2.9% for Medicare
+0.9% additional Medicare tax on income over $200,000 (single) or $250,000 (married filing jointly)
Note: The Social Security portion only applies to your first $168,600 in net income for 2024.
Who Has to Pay It?
You owe self-employment tax if you:
Earn $400 or more in self-employment income
Work as a freelancer, gig worker, consultant, or contractor
Run a sole proprietorship, single-member LLC, or small business without payroll
Even if you have a side hustle while working a full-time job, you still need to pay self-employment tax on the side income.
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How Is It Calculated?
Self-employment tax is based on your net earnings, that’s your income after deducting business expenses. You calculate it on:
Schedule C (Profit or Loss from Business)
Schedule SE (Self-Employment Tax)
Let’s say you earned $50,000 after expenses. Your self-employment tax would be:
$50,000 × 92.35% = $46,175 (net earnings for SE tax purposes)
$46,175 × 15.3% = $7,065 in self-employment tax
Can You Deduct Self-Employment Tax?
Yes! You can deduct half of your self-employment tax—specifically, the portion your "employer" would normally pay if you were a W-2 employee.
This is called the employer-equivalent deduction, and it helps reduce your taxable income, not your self-employment tax itself.
Simple Example:
Let’s say your total self-employment tax is $6,000.
You can deduct $3,000 (half) when calculating your adjusted gross income on your tax return.
This deduction lowers the amount of income the IRS uses to calculate your regular income tax—so you may owe less overall.
Important:
This is a “for AGI” deduction, so you can take it even if you don’t itemize.
It doesn’t reduce your self-employment tax directly—it reduces your income tax.
When Do You Pay It?
Since no one is withholding tax from your payments, the IRS expects you to make estimated tax payments quarterly:
April 15
June 15
September 15
January 15 (of the following year)
Missing these deadlines may result in penalties and interest.
Final Thoughts
Self-employment tax can feel overwhelming, but once you understand how it works, you can plan for it—and avoid surprises at tax time. The key is to:
Track your income and expenses
Set aside money for taxes year-round
Make your quarterly payments on time
Work with a tax pro if your situation gets more complex
