Understanding Self-Employment Tax
Self-employment tax covers Social Security and Medicare contributions for people who work for themselves. Unlike W-2 employees who split these taxes with their employer, self-employed individuals pay the full amount (both the employee and employer portions).
The SE tax is calculated on 92.35% of your net self-employment income. The combined rate is 15.3%, consisting of 12.4% for Social Security and 2.9% for Medicare. An additional 0.9% Medicare surtax applies to income above ,000.
You can deduct half of your SE tax as an above-the-line deduction on your income tax return, which reduces your adjusted gross income.
Frequently Asked Questions
Who has to pay self-employment tax?
Anyone with net self-employment income of or more must pay SE tax. This includes freelancers, independent contractors, sole proprietors, and partners in a partnership.
Why is the SE tax calculated on 92.35% of income?
The 92.35% factor simulates the employer-side deduction that W-2 workers receive. Employers deduct their half of FICA before it affects the employee, so the 7.65% reduction makes SE tax treatment equivalent.
When are quarterly estimated payments due?
Quarterly estimated payments are typically due April 15, June 15, September 15, and January 15 of the following year. Missing these deadlines may result in underpayment penalties.
Can I deduct business expenses to reduce SE tax?
Yes, legitimate business expenses reduce your net self-employment income, which in turn reduces both your SE tax and income tax. Keep detailed records of all business-related expenses.
Is there a cap on Social Security tax?
Yes, Social Security tax applies only up to the annual wage base (,600 for 2024). Income above this threshold is not subject to the 12.4% Social Security portion, but Medicare tax applies to all income with no cap.