What Self-Employment Tax Is and How Much You Pay

Self-employment tax is a Social Security and Medicare tax that you pay on your net business income when you work for yourself. The current rate is 15.3 percent of your net earnings: 12.4 percent goes to Social Security and 2.9 percent goes to Medicare. You pay both the employer and employee portions yourself, unlike employees who split these taxes with their employer.

The Social Security portion (12.4 percent) only applies to earnings up to a certain limit, which changes each year. For 2024, that limit is $168,600 of net self-employment income. Once you earn above that amount, you stop paying the 12.4 percent Social Security tax on the extra income. The Medicare portion (2.9 percent) has no income limit, and an additional 0.9 percent Medicare tax applies to higher earners.

You owe self-employment tax if your net business income is $400 or more in a year. This applies whether you are a sole proprietor, a partner in a partnership, or an independent contractor. If you have a business loss, you do not owe self-employment tax that year.

Key Takeaways

  • Self-employment tax is 15.3 percent of your net business income: 12.4 percent for Social Security and 2.9 percent for Medicare.
  • You pay both the employer and employee portions yourself, which is roughly double what an employee pays in payroll taxes.
  • The Social Security portion stops explore once you reach the annual earnings cap, which was $168,600 in 2024.
  • You owe self-employment tax only if your net business income reaches $400 or more in a year.
  • You can deduct half of your self-employment tax when calculating your adjusted gross income on your tax return.

How to Calculate Your Self-Employment Tax

Start with your net business income—the profit left after you subtract business expenses from your gross revenue. This is the number you report on Schedule C (for sole proprietors) or Schedule E (for rental income). Self-employment tax is calculated on this net income, not your gross revenue.

Multiply your net business income by 92.35 percent. This accounts for the fact that you can deduct half of your self-employment tax as a business expense. Then multiply that result by 15.3 percent to get your self-employment tax. For example, if your net business income is $50,000, you would calculate: $50,000 × 0.9235 = $46,175, then $46,175 × 0.153 = $7,065 in self-employment tax.

You report this calculation on Schedule SE (Self-Employment Tax), which you file with your federal income tax return. The IRS provides a worksheet on Schedule SE to walk you through the steps. If you use tax software, it typically calculates this for you once you enter your net business income.

The Social Security Earnings Cap and Additional Medicare Tax

The Social Security portion of self-employment tax (12.4 percent) only applies to your first $168,600 of net self-employment income in 2024. This limit increases slightly most years based on wage growth. Once you earn above this cap, you stop paying the 12.4 percent Social Security tax on income above it, but you continue paying the 2.9 percent Medicare tax on all income with no limit.

If you earn more than $200,000 as a single filer (or $250,000 if married filing jointly), you owe an additional 0.9 percent Medicare tax on the income above those thresholds. This is separate from the regular 2.9 percent Medicare tax and applies to both self-employment income and wages from employment. You report this additional tax on Form 8959.

The earnings cap and income thresholds change each year, so check the IRS website or your tax software for the current year's numbers before you file.

When You Pay Self-Employment Tax During the Year

Unlike employees who have taxes withheld from each paycheck, self-employed people usually pay self-employment tax through estimated quarterly taxes. You calculate what you expect to owe for the year and divide it into four payments due on April 15, June 15, September 15, and January 15 of the following year.

You are not required to make quarterly payments if you expect to owe less than $1,000 in total federal income tax and self-employment tax for the year. In that case, you can pay the full amount when you file your return. However, if you do not pay enough throughout the year, you may owe a penalty when you file, even if you ultimately do not owe any tax.

Form 1040-ES helps you calculate your estimated quarterly payment. You can also use IRS Form 1040-ES worksheets or tax software to figure out what to pay each quarter. If your income changes significantly during the year, you can adjust your quarterly payments to avoid overpaying or underpaying.

The Deduction for Half Your Self-Employment Tax

You can deduct half of your self-employment tax when you calculate your adjusted gross income (AGI). This deduction reduces the income subject to federal income tax, though it does not reduce the self-employment tax itself. If you paid $7,000 in self-employment tax, you can deduct $3,500 from your income.

This deduction appears on line 14 of Form 1040 (U.S. Individual Income Tax Return) and is calculated automatically by tax software. It is one of the few deductions available to self-employed people without itemizing, and it applies whether you take the standard deduction or itemize deductions.

Self-Employment Tax for Specific Situations

If you are a member of a partnership or a limited liability company (LLC) taxed as a partnership, you owe self-employment tax on your share of the partnership's net income, even if you do not withdraw that money. The partnership reports your share on Schedule K-1, which you use to calculate your self-employment tax on Schedule SE.

If you have both self-employment income and wages from an employer, you calculate self-employment tax only on the self-employment income. However, the Social Security earnings cap applies to your combined income from all sources. If you earned $150,000 in wages and $30,000 in self-employment income, the Social Security tax on your self-employment income would only explore to $18,600 of it (the difference between $168,600 and $150,000).

Certain types of income do not count toward self-employment tax. Rental income from real estate is generally not subject to self-employment tax unless you are in the business of renting property. Dividend income, interest, and capital gains are also excluded. However, if you provide services related to the rental property (such as cleaning or repairs), that income may be subject to self-employment tax.

Frequently Asked Questions

Can I reduce my self-employment tax by deducting business expenses?

Yes. Self-employment tax is calculated on your net business income after you subtract all legitimate business expenses. The more expenses you deduct, the lower your net income and the lower your self-employment tax. Keep records of all business expenses—supplies, equipment, mileage, home office costs, and professional services—to maximize this reduction.

What happens if I do not pay estimated quarterly taxes?

You can still file your tax return and pay the full amount owed, but you may owe an underpayment penalty. The penalty is calculated based on how much you should have paid each quarter and how late the payment was. If your income is uneven throughout the year, you can use the annualized income method on Form 1040-ES to avoid penalties on quarters when you earned less.

Do I owe self-employment tax on income from a side gig or hobby?

If your side work is a legitimate business (you intend to make a profit and operate it in a businesslike way), you owe self-employment tax on the net income. If it is a hobby, you generally do not owe self-employment tax, but you still report any income on your tax return. The IRS looks at factors like whether you keep records, advertise, and have made a profit in at least three of the last five years to determine if something is a business or a hobby.

How do I know what my net business income is for self-employment tax?

Your net business income is the bottom line of Schedule C (Profit or Loss from Business) or Schedule E (Supplemental Income). It is your gross revenue minus all business expenses you can deduct. If you use an accountant or tax software, they calculate this for you. If you track income and expenses throughout the year in a spreadsheet or accounting software, you can add up your totals to find your net income.