What is self-employment tax? Definition and how to calculate it

Published

Mar 31, 2025

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If you’ve ever worked with independent contractors or onboarded new members to a partnership, you’ve likely fielded questions like, “Will I receive a 1099 or a W-2?” or “Do I owe quarterly tax payments?” Understanding self-employment tax, particularly who’s responsible for paying what, helps you communicate clearly with freelancers and partners.

In this article, we’ll review what self-employment tax covers, who pays it, and how it’s calculated, so you can provide guidance to team members without second-guessing what the IRS expects.

What is self-employment tax?

Self-employment tax is a federal tax that covers Social Security and Medicare contributions for people who work for themselves. Unlike employees, who split these taxes with their employers, self-employed workers are responsible for the entire amount. Currently, that’s 15.3% of their net earnings (more if the Additional Medicare tax applies).

Self-employment tax applies to freelancers, independent contractors, sole proprietors, members of partnerships, and others who earn money outside a traditional employer-employee relationship. Instead of having taxes withheld from their paychecks over the course of the year, they make estimated tax payments throughout the year.

How does self-employment tax work?

The self-employment tax exists to ensure that self-employed workers contribute to important programs like Social Security and Medicare, just like traditional employees do through payroll withholding. The key difference? Contractors, sole proprietors, and partners pay both the employee’s and the employer’s share, which adds up to 15.3% of their net earnings.

Instead of having FICA taxes withheld from a paycheck, a self-employed worker calculates their own tax, files the necessary tax forms, and sends estimated tax payments to the IRS throughout the year. The U.S. government, in turn, uses this money to find future Social Security and Medicare coverage.

Who needs to pay self-employment tax?

Anyone who earns more than $400 annually working as an independent contractor or for their own business will owe self-employment tax on those earnings. Self-employment tax can apply to several types of work arrangements, and the IRS looks at how income is earned rather than titles to decide whether a worker needs to pay. Be careful when classifying workers to ensure everyone stays aligned on who’s responsible for FICA taxes.

Freelancers and independent contractors - Someone who earns income for services performed outside a traditional employer-employee relationship may be considered self-employed.

Example: Casey, a copywriter, earns $25,000 from a one-off project for a client. Casey will need to pay self-employment taxes on this income based on a Form 1099-NEC issued by the company.

Small business owners and sole proprietors - Individuals who run their own businesses and have not incorporated typically operate as sole proprietors. The IRS treats their business income as personal income for tax purposes, but they’ll still owe self-employment taxes.

Example: Jordan runs a home-based baking business that earns $50,000 after subtracting business expenses. Jordan will report the $50,000 as personal income on Form 1040, with Schedule C and Schedule SE attached.

Partners in a business partnership - The IRS usually considers individuals who share ownership in a business partnership self-employed for tax purposes. Each partner pays self-employment tax based on their share of the business’s net earnings.

Example: Riley is one of four equal partners in a design firm that reports $2.8 million in net earnings on Form 1065. Riley will therefore pay self-employment tax on their share of $700,000, as reported on Schedule K.

How much is self-employment tax?

The self-employment tax isn’t a fixed percentage that applies across the board. Certain rates can vary depending on how much someone earns in net income. The component taxes that make up self-employment tax, however, remain the same.

Social Security tax - 12.4% of net annual earnings, up to an income threshold that changes every year.
Medicare tax - 2.9% of net annual earnings with no income threshold.
Additional Medicare tax - 0.9% of earnings over $200,000.

In most cases, self-employment taxes equal 15.3% of net earnings. If a worker brings home more than $200,000, however, the Additional Medicare tax will lead to a slight increase. So, which individual rates are consistent, a self-employed person’s actual tax liability will vary depending on income level and structure.

How to calculate self-employment tax

While employers aren’t responsible for withholding self-employment taxes on behalf of independent contractors, understanding the process of calculating self employment tax can help when working with freelancers or fielding tax-related questions. Below, we’ll demonstrate how to file self-employment tax for a typical independent contractor.

Step 1. Calculate net self-employment income

Start by adding up earnings from all sources to find gross income. Next, add together any qualifying business expenses. Subtract expenses from gross income to find net self-employment income.

Example: Taylor works as a freelance graphic designer. In the last tax year, Taylor worked on projects for three clients, and was paid $35,000, $20,000, and $15,000 for a total gross income of $70,000. At the same time, Taylor spent $10,000 on qualifying business expenses. That leaves $60,000 in net self-employment income.

Step 2. Apply the 92.35% adjustment

The IRS only taxes 92.35% of a self-employed worker’s income to reflect the employer-side FICA tax burden. Multiply net income by 0.9235 to find net earnings subject to tax.

Example: Taylor multiples $60,000 by .09235 to find $55,410 in net earnings. Taylor will use this number to calculate FICA taxes.

Step 3. Calculate the Social Security tax portion

Multiply net earnings by 0.124 to find the Social Security tax. Note that this applies only up to the annual wage limit—$176,100 in 2025.

Example: 12.4% of Taylor’s $55,410 in net earnings works out to Social Security taxes of $6,869.88.

Step 4. Calculate the Medicare tax portion

Unlike Social Security, Medicare taxes aren’t capped, and an Additional Medicare Tax may apply for self-employed workers who earn more than $200,000. To find the Medicare tax, multiply net earnings by 0.29.

Example: 2.9% of Taylor’s total $55,410 net earnings equals $1,607.89 in Medicare taxes.

Step. 5 Determine the total self-employment tax

To find the total self-employment tax, add together the Social Security and Medicare taxes from Steps 3 and 4. Remember, self-employed workers may deduct up 50% of the amount owed on Form 1040 to reduce their overall taxable income and, by extension, their tax liability.

Example: Taylor adds together the $6,869.88 in Social Security tax and $1,607.89 in Medicare tax to arrive at a total self-employment tax of $8,477.77. On Form 1040, Taylor deducts $4,238.89—half of the overall amount—for a lower adjusted gross income.

Tax deductions for self-employed workers

Because self-employed workers don’t have taxes withheld from each paycheck, many rely on itemized tax deductions to lower their overall taxable income. Fortunately, IRS allows people who work for themselves to claim back certain business expenses, similar to what a company might deduct on its corporate tax return.

Home office expenses

If a self-employed worker uses space in their home as a dedicated work space, the home office deduction allows them to write off a portion of related expenses, like rent or mortgage, utilities, and maintenance. Taxpayers can choose to either work through a more precise calculation that takes into account property depreciation and actual expenses, or use a simplified method: $5 per square foot, up to 300 square feet.

Internet and phone bills

If a self-employed worker uses a home internet connection, cell phone, or landline for business, they can deduct a portion of the annual bill. For example, if 60% of calls made on a phone line are to suppliers or clients, the business owner can deduct 60% of the bill as a business expense. Claiming this deduction requires keeping detailed tax records throughout the tax year.

Health insurance premiums

Some self-employed workers can deduct the full cost of health, dental, and long-term care insurance premiums for themselves, spouses, and dependents, provided the plans meet IRS requirements. Because this deduction is an “above the line” deduction on Form 1040, it reduces adjusted gross income and can lead to significant tax savings.

Professional development

Costs associated with courses, certifications, conferences, and subscriptions related to a person’s trade or profession are sometimes eligible for deduction as business expenses. To qualify, however, the educational opportunity must build or maintain existing skills, rather than train someone for a new career.

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Tax forms for self-employed workers

Filing taxes as a self-employed worker isn’t a “one form fits all” proposition. The specific form someone needs will depend on the structure of their business, whether they’re a sole proprietor, a member of a partnership, or a 1099 contractor. Below, we’ll break down the most common forms, how they’re used, and who needs to file them.

Form 1040

Almost all taxpayers file this standard income tax form. A self-employed worker uses Form 1040 to report their adjusted gross income and calculate income tax liability. Most will also file additional schedules for business income and deductions.

Form 1099-NEC

Businesses issue a Form 1099-NEC to any independent contractors paid more than $600 in a year. Similar to a Form W-2 for a full-time employee, this tax form helps self-employed workers accurately report their incomes to the IRS. Remember, the 1099-NEC differs from the 1099-MISC, which businesses use to cover miscellaneous expenses.

Form 1065

An LLC operating as a partnership uses Form 1065 to report the business’s total income, net earnings, and any deductions. Each partner also receives a Schedule K-1 showing their share, which they’ll report as income on their personal tax return.

Form 8829

Self-employed workers eligible for the home office deduction use Form 8829 to claim it. Because claiming this deduction can become a bit involved depending on circumstances—did the property depreciate? Were repairs done?—the IRS developed Form 8829 to help guide self-employed workers through the calculations.

Schedule 1

Some self-employed workers use Schedule 1 to report adjustments to income. Filed together with Form 1040, this tax form has spaces for taxpayers to report additional income from sources like alimony or unemployment, as well as deductions for student loan interest or the employer portion of self-employment tax.

Schedule C

Self-employed workers use Schedule C to break down the income earned working for themselves, as well as any related business expenses. It’s also how they calculate the net profit or loss, which helps determine their self-employment tax liability.

Schedule SE

Schedule SE uses the information on net earnings from Schedule C to calculate how much a self-employed worker owes in Social Security tax and Medicare tax, as well as how much they’re entitled to deduct from their taxable income.

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How to calculate self-employment tax FAQs

How do I calculate self-employed withholding tax?

To calculate your self-employed withholding tax, first determine your net earnings by subtracting your business expenses from your gross income. Next, apply the self-employment tax rate of 15.3% to cover your FICA taxes for Social Security and Medicare. Remember, only 92.35% of your self-employment income is taxable, so multiply your net earnings by 0.9235 before applying the tax rate.

So, if your net earnings are $50,000, your self-employment tax is $7,650. You have the option to deduct half of this amount on the self-employment tax form to reduce your overall tax liability.

What is the self-employment tax for an LLC?

The self-employment tax for an LLC depends on how it’s taxed. A single-member LLC taxed as a sole-proprietorship will pay 15.3% on net earnings: 12.4% in Social Security tax and 2.9% in Medicare tax. In a multi-member LLC taxed as a partnership, each partner pays self-employment tax on their share of the partnership income. If the company operates as an S-corp, only wages are subject to FICA tax; dividends aren’t subject to self-employment tax.

What is an example of a self-employment tax deduction?

Examples of a self-employment tax deduction include the home office deduction, which allows a self-employed worker using 200 square feet of their home for business to deduct $1,000 as a business expense. Self-employed workers can also deduct other qualifying business expenses like internet, office supplies, and software, which lowers net earnings and reduces self-employment tax liability. Health insurance premiums and half of the self-employment tax can also be deducted, which further decreases taxable income.

What are the differences between income tax and self-employment tax?

Income tax applies to all taxable income, whether earned as a W-2 employee, a 1099 contractor, or a business owner. The rate depends on gross income, deductions, and tax brackets. Self-employment tax, on the other hand, applies only to income earned from self-employment and covers Social Security and Medicare. A person who works full-time as a teacher while also maintaining an online tutoring business will pay income tax on both salary and any revenue generated by the tutoring work. Only the money earned tutoring will be subject to self-employment tax, however.

Is self-employment tax in addition to income tax?

Yes, self-employment tax is separate from and in addition to income tax and covers the Social Security and Medicare taxes owed based on a self-employed worker’s net earnings. Unlike traditional employees, who split FICA taxes with their employers, a self-employed worker pays the full amount. This is separate from federal income tax, which is calculated based on a worker’s net earnings. A self-employed worker can, however, reduce their tax liability by deducting the employer portion of FICA taxes from their earned income.

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