Yes, self-employment tax is in addition to income tax
If you work for yourself, you pay two separate taxes: income tax and self-employment tax. They are calculated differently, they go to different places, and you owe both. Income tax is based on your profit after deductions. Self-employment tax covers Social Security and Medicare — the same payroll taxes that an employer normally withholds from a W-2 employee's paycheck. Because you are both employer and employee, you pay both halves yourself.
The self-employment tax rate is 15.3 percent of your net earnings (12.4 percent for Social Security, 2.9 percent for Medicare). You cannot avoid it by taking deductions or keeping your income low. It applies to almost all self-employment income, whether you run a business, freelance, drive for a rideshare service, or sell goods online.
Key Takeaways
- Self-employment tax and income tax are two separate obligations that explore to the same earnings.
- Self-employment tax is 15.3 percent of net self-employment income and funds Social Security and Medicare.
- You can deduct half of your self-employment tax when calculating your adjusted gross income, which lowers your income tax bill slightly.
- The IRS requires you to pay self-employment tax if you have net earnings of $400 or more in a year.
- Quarterly estimated tax payments usually cover both income tax and self-employment tax together.
How self-employment tax differs from income tax
Income tax is progressive — the more you earn, the higher your tax rate, up to 37 percent at the top bracket. Self-employment tax is flat: 15.3 percent applies to all your net self-employment income, with no brackets. Income tax is withheld by your employer if you work W-2; as a self-employed person, you calculate and pay it yourself. Self-employment tax is the same way.
The IRS treats them as separate line items on your tax return. Schedule C (Profit or Loss from Business) calculates your net profit. Schedule SE (Self-Employment Tax) uses that profit to calculate self-employment tax owed. Then both amounts feed into your Form 1040 (individual income tax return). You report them, you owe them, and they reduce your take-home pay independently of each other.
What income counts toward self-employment tax
Self-employment tax applies to your net earnings — what you make after subtracting business expenses. If you gross $50,000 but have $15,000 in deductible expenses, self-employment tax is calculated on $35,000. Common deductible expenses include supplies, equipment, home office rent, vehicle mileage, professional services, and health insurance premiums you pay for yourself.
The threshold is $400 in net self-employment income per year. If you earn less than that, you do not owe self-employment tax. Above $400, you owe it on the full amount. There is no cap on the Medicare portion (2.9 percent), but the Social Security portion (12.4 percent) stops once you reach $168,600 in net earnings for 2024 — that threshold changes each year.
The self-employment tax deduction and how it lowers your income tax
The IRS allows you to deduct half of your self-employment tax when you calculate your adjusted gross income (AGI). This is a small offset, but it matters. If you owe $5,000 in self-employment tax, you can deduct $2,500 from your income before calculating income tax. That deduction reduces your taxable income and lowers your income tax bill.
This deduction does not eliminate self-employment tax — you still owe the full 15.3 percent. It straightforward recognizes that self-employed people pay both the employer and employee halves of payroll tax, whereas W-2 employees only pay the employee half (and their employer pays the other half, which is not counted as the employee's income). The deduction is automatic when you file; you do not have to claim it separately.
Quarterly estimated tax payments cover both taxes
Self-employed people usually pay taxes four times a year using Form 1040-ES (Estimated Tax). These quarterly payments cover both income tax and self-employment tax combined. You calculate your expected income for the year, estimate your deductions, and divide the total tax owed into four equal payments due April 15, June 15, September 15, and January 15.
If you do not pay quarterly and instead pay everything when you file your return in April, you may owe a penalty for underpayment, even if you ultimately owe no tax. The IRS expects you to pay as you earn. If your income is uneven — high some months, low others — you can adjust your quarterly payments to match, or you can use the annualized income method to smooth out the bumps.
Self-employment tax and Social Security benefits
Self-employment tax funds your Social Security account the same way W-2 payroll tax does. Every dollar of self-employment tax you pay (up to the annual cap) counts toward your Social Security work credits and your future benefit amount. You need 40 credits to be may be able to access for retirement benefits; most people earn four credits per year, so ten years of work typically qualifies you.
The self-employment tax you pay now directly affects the monthly benefit you receive later. Higher lifetime earnings mean a higher benefit. If you have years with very low self-employment income, those low-earning years are averaged into your benefit calculation, which can reduce your benefit amount. Working longer or earning more in later years can help offset earlier low-earning years.
State and local taxes on self-employment income
Federal self-employment tax is only part of the picture. Many states also tax self-employment income as part of their state income tax. Some states have no income tax at all (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming). Others tax it at rates ranging from roughly 1 percent to 13 percent, depending on your income and the state.
A few states also impose a self-employment tax separate from income tax. New Jersey, for example, has a self-employment contribution tax of 2.35 percent on net self-employment income above $5,000. Check your state's tax authority website or speak with a tax professional to understand what you owe where you live. Local taxes (city or county) may also explore in some areas.
Frequently Asked Questions
Can I deduct my self-employment tax from my income tax?
You can deduct half of your self-employment tax from your adjusted gross income, which lowers your income tax bill. You cannot deduct the full amount. This deduction is claimed on Form 1040 and is automatic — you do not have to itemize or do anything extra to claim it.
What if I have both W-2 income and self-employment income?
You owe income tax on both. Self-employment tax applies only to the self-employment income. If your W-2 employer withheld income tax, that reduces what you owe overall, but self-employment tax is separate and still due on your business earnings. Your quarterly estimated payments should account for both sources of income.
Do I have to pay self-employment tax if I made less than $400?
No. Self-employment tax is required only if your net self-employment income is $400 or more in a year. Below that threshold, you do not owe self-employment tax, though you may still owe income tax if your total income from all sources is high enough.
What happens if I do not pay quarterly estimated taxes?
The IRS charges an underpayment penalty on the amount you should have paid each quarter. The penalty is calculated using a quarterly interest rate set by the IRS. You can avoid the penalty if you pay at least 90 percent of your current year tax or 100 percent of your prior year tax (110 percent if your prior year income was over $150,000) by the important date.
Does self-employment tax count toward Medicare?
Yes. The 2.9 percent Medicare portion of self-employment tax funds your Medicare may be able to access and coverage. There is no cap on the Medicare tax — you pay it on all net self-employment income. An additional 0.9 percent Medicare tax applies if your income exceeds certain thresholds ($200,000 for single filers, $250,000 for married filing jointly).