What Self-Employment Tax Means in Plain English
Self-employment tax is the Social Security and Medicare tax that self-employed people pay. It totals 15.3% of net self-employment income. If you’re a freelancer, independent contractor, gig worker, or sole proprietor and you earn more than $400 in a year, you owe self-employment tax.
Here’s the part that surprises most people: when you’re employed by a company, you pay 7.65% in FICA taxes (Social Security + Medicare), and your employer pays the other 7.65%. When you’re self-employed, you’re both the employee and the employer. You pay both halves: 15.3% total.
This is in addition to regular income tax. Self-employment tax is often the bigger financial shock for new freelancers and contractors — they expect to pay income tax, but they don’t realize they’re also on the hook for the full FICA amount.
How Self-Employment Tax Works
Self-employment tax is calculated on Schedule SE when you file your return.
The rate:
- Social Security: 12.4% on net self-employment income up to $168,600 (2024 wage base)
- Medicare: 2.9% on all net self-employment income
- Total: 15.3%
The deduction: The IRS treats the employer half of self-employment tax (7.65%) as a business expense, so you can deduct it from your AGI. This doesn’t eliminate the tax, but it reduces your taxable income. On $50,000 of net self-employment income, you’d owe $7,065 in self-employment tax — but can deduct roughly $3,532 from your income.
The threshold: You owe self-employment tax on net self-employment earnings of $400 or more in a year.
Quarterly payments: If you expect to owe more than $1,000 in self-employment taxes, you’re required to make quarterly estimated tax payments. Missing them can result in underpayment penalties.
Why Self-Employment Tax Matters to You
The practical implication: if you’re newly self-employed, your effective tax rate is higher than you probably think. Between income tax and self-employment tax, a self-employed person earning $60,000 in net income and in the 22% bracket might owe:
- Federal income tax: ~$6,000 (after deductions)
- Self-employment tax: ~$8,478 (15.3% × $55,380 — after the SE tax deduction adjusts the income base)
Combined federal tax burden: roughly $14,478, or about 24% of gross self-employment income.
The standard advice: set aside 25-30% of every payment you receive for taxes. This covers both income tax and self-employment tax, and it avoids the gut-punch of a large April tax bill you didn’t anticipate.
Quick Example
Morgan does freelance web design and earns $72,000 in net income after business expenses.
- Self-employment tax: 15.3% × ($72,000 × 0.9235) = 15.3% × $66,492 = $10,173 (The 0.9235 factor reflects the SE tax deduction on the computation)
- SE tax deduction (half of SE tax): $10,173 ÷ 2 = $5,087 reduction to AGI
- Adjusted AGI: $72,000 − $5,087 = $66,913
- After standard deduction ($14,600): Taxable income = $52,313
- Federal income tax: approximately $7,600 (22% bracket)
Total federal taxes: ~$17,773 on $72,000 in self-employment income
Morgan should set aside $24,000 (33%) of gross income throughout the year to cover this comfortably.
Common Misconceptions
- Self-employment tax is the same as income tax. They’re separate. Self-employment tax covers Social Security and Medicare. Income tax is calculated separately. Both apply to self-employment income.
- If I form an LLC, I avoid self-employment tax. A single-member LLC taxed as a sole proprietorship (the default) still owes self-employment tax. S-corp election can reduce SE tax for high earners, but has its own complexity and costs.
- The SE tax deduction eliminates the cost. The deduction only covers half of the SE tax (the “employer” portion), reducing your income tax slightly. The 15.3% SE tax still hits your net income — the deduction just reduces the income tax on top of it.