Self-employment tax: What it is and how to calculate it

Self employment income is often reported on a 1099-NEC or 1099-MISC, but be aware that self-employed individuals are required to report all income earned, even if they do not receive a 1099 from a payer. The self-employed may pay more taxes than what an employer pays in FICA per employee. The reason is that self-employed individuals pay both the employer and employee portion of FICA tax. However, there are deductions that can help eligible self-employed people reduce their federal and state tax liabilities. For both tax years 2024 and 2025, the self-employment tax rate is 15.3 percent. That tax rate includes both the 12.4 percent tax for Social Security and the 2.9 percent tax for Medicare.

• The IRS allows you to deduct the employer-equivalent portion of your self-employment tax (7.65%, representing half of the total 15.3% tax rate) directly from your income, which effectively reduces the income tax you owe.
• Self-employed individuals must pay self-employment tax as a condition of receiving Social Security benefits upon retirement.
• People were considered to be self-employed or employed by a small business if they self-reported being self-employed or working at a business with between one and 24 employees.
• Additionally, insurers are proposing an increase in gross premiums (before premium tax credits are applied) of 18%, partly due to the impact on the risk pool of the expiration of enhanced premium tax credits.

Tax Guide for Small Business

This includes freelancers, independent contractors, and small business owners. It’s important for self-employed individuals to keep track of their earnings to ensure they meet this requirement. The self-employment tax applies to people who work for themselves and consists of Social Security and Medicare taxes.

If you have both wages from an employer and self-employment income, the Social Security tax on your wages is paid first. If the combined total of your self-employment income and wages is greater than the Social Security wage base for the year, this can help lower the amount of self-employment tax you owe. But depending on your income, filing status, and other factors, the amount you owe for one or both of these taxes could be reduced – or even eliminated, in the case of the income tax. Additional Medicare tax applies to self-employment income above a threshold. The threshold amounts are $250,000 for a married individual filing a joint return, $125,000 for a married individual filing a separate return, and $200,000 for all others. For additional information, refer to the Instructions for Form 8959, Additional Medicare Tax and Questions and answers for the Additional Medicare tax.

You will need your prior year’s annual income tax return in order to fill out Form 1040-ES. Self-employed individuals can deduct half of their self-employment tax when filing their income taxes. For instance, if someone owes $2,000 in self-employment tax, they can deduct $1,000 on their tax return. If you’re self-employed, you’ll likely be on the hook to pay self-employment taxes for Social Security and Medicare, in addition to income taxes. Because you don’t have an employer who is withholding these payroll taxes from your paycheck, it’s your responsibility to keep track of and then pay your estimated taxes four times a year. The SE tax applies if net earnings from self-employment are $400 or more.

High earners should regularly review their financial situation to ensure they are taking advantage of all possible tax benefits. Individuals who are self-employed typically calculate their self-employment tax on 92.35% of their net earnings, not the self employment tax full 100%. Additionally, Medicare tax is charged at 2.9%, also divided equally between the employer’s and employee’s contributions (1.45% each), with no cap on the income subject to this tax. You must pay this tax if your net earnings from self-employment exceed $400 in a year, or if you earn $108.28 or more from a tax-exempt church.

More products from Intuit

The self-employment tax is just a portion of the overall taxes you must pay. You’ll still need to pay income tax — the income tax rate you pay is determined by which tax bracket you fall into. It’s the sum of a 12.4 percent tax for Social Security and a 2.9 percent tax for Medicare. While employers deduct these payroll taxes on behalf of their workers, people who are self-employed must file the self-employment tax directly with the IRS. From 6 April 2026, Making Tax Digital for Income Tax Self Assessment (MTD ITSA) will apply to sole traders and landlords whose combined gross income from self-employment and/or property exceeds £50,000 a year.

Earn more with freedom

But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. Self-employed individuals must pay self-employment tax as a condition of receiving Social Security benefits upon retirement. This may influence which products we review and write about (and where those products appear on the site), but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research. Our partners cannot pay us to guarantee favorable reviews of their products or services.

The term sole proprietor also includes the member of a single member LLC that’s disregarded for federal income tax purposes and a member of a qualified joint venture. You usually must pay self-employment tax if you had net earnings from self-employment of $400 or more. Generally, the amount subject to self-employment tax is 92.35% of your net earnings from self-employment. You calculate net earnings by subtracting ordinary and necessary trade or business expenses from the gross income you derived from your trade or business. You can be liable for paying self-employment tax even if you currently receive Social Security benefits.

Consult an attorney or tax professional regarding your specific situation. Many freelancers may qualify for a deduction of up to 20% for qualified business income. In addition, contributions to certain retirement accounts may also be tax-deductible. Keep in mind, the Internal Revenue Service (IRS) dictates the maximum amount you can contribute in a given year.

• A tax professional can help you minimize your self-employment tax by ensuring that you’re claiming all of the deductions and credits you’re eligible for each year.
• While we strive to provide a wide range of offers, SelfEmployed does not include information about every financial or credit product or service.
• Enabled by data and technology, our services and solutions provide trust through assurance and help clients transform, grow and operate.
• From 6 April 2026, Making Tax Digital for Income Tax Self Assessment (MTD ITSA) will apply to sole traders and landlords whose combined gross income from self-employment and/or property exceeds £50,000 a year.
• This information was compiled by the advanced planning attorneys of The Northwestern Mutual Life Insurance Company.
• This applies when earned income (wages and self-employment income) exceeds $200,000 (single); $250,000 (joint filers).

The self-employment (SE) tax was created in 1951 to enable self-employed individuals to build up Social Security (and, starting in 1966, Medicare) credits. Self-employed individuals do not pay Federal Insurance Contributions Act (FICA) taxes. Essentially, the SE tax is a combination of the employer and employee share of FICA, applied to net earnings from self-employment.

Typically, the employee’s Social Security and Medicare taxes are automatically withheld from each paycheck, and the employer’s matching taxes are periodically remitted to the IRS. All features, services, support, prices, offers, terms and conditions are subject to change without notice. Intuit reserves the right to modify or terminate any offer at any time for any reason in its sole discretion.

When choosing a business entity type, if you opt for a sole proprietorship or independent contractor status, you can use a Schedule C form to figure out your net earnings from self-employment. Remember, only 92.35 percent of your net earnings are subject to the self-employment tax. If the math is getting complicated, keep in mind there’s payroll software built for one employee to keep things simple. So, you’ve started a business or decided to freelance, and freed yourself from the daily grind of that old job. In fact, you’ll owe tax that you never had to pay as an employee if you made $400 or more in self-employment net income. Before you can determine if you are subject to self-employment tax and income tax, you must figure any net profit or net loss from your business.