What Is Self-Employment Tax?

Self-Employment Taxes Explained in Less Than 5 Minutes

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Definition
Self-employment tax is levied on self-employment income of $400 or more and covers Social Security and Medicare taxes. Self-employment tax applies to income earned as a freelancer, consultant, or independent contractor.

Key Takeaways

  • Self-employment tax is the combined amount of Social Security and Medicare taxes owed by self-employed individuals.
  • Self-employment tax is equivalent to the payroll taxes paid by employers and employees, and the standard rate is 15.3%.
  • Even if you pay FICA taxes through your employer, you might owe self-employment tax if you earn income from a side hustle or freelance business.

How Self-Employment Tax Works

Self-employment tax is levied on self-employment income and covers Social Security and Medicare taxes. Typically, anyone with net self-employment income of $400 or more has to pay self-employment taxes to account for the fact that they are not withheld from a paycheck like they would be in an employee-employer relationship.

Who Owes Self-Employment Tax?

Self-employment tax applies to income earned as a freelancer, consultant, or independent contractor, such as if you work for a food delivery or ridesharing app. If the company you work for doesn’t withhold payroll taxes and you’re not classified as an employee, your income would typically be considered self-employment income and you would owe self-employment tax. 

For example, a graphic designer who works full time at a software company might have Social Security and Medicare taxes withheld from each paycheck, along with other taxes like federal income tax. 

However, if that graphic designer earns $500 per month doing freelance work for a local business, they would likely receive the full payment each month, without having any amount withheld. They would then be responsible for reporting and paying the self-employment tax on this freelance income, along with any other taxes. They would have to do so on their own accord, which would typically involve making estimated tax payments.

Note

The Social Security portion of self-employment taxes has an income cap. For 2022, the first $147,000 in net income is taxable for Social Security.

People who earn more than a specific amount of income, including self-employment income, based on their filing status could be subject to a 0.9% additional Medicare tax. For single filers, that threshold is $200,000, while for married couples filing jointly, it’s $250,000.

How Much is Self-Employment Tax

The standard rate is 15.3%, which includes a 12.4% Social Security tax and a 2.9% Medicare tax. This 15.3% tax is applied to 92.35% of a self-employed individual’s net earnings, or the amount left over after any deductions for business expenses.

For example, if you netted $60,000 running your own dog walking business in 2021, you would calculate 92.35% of $60,000, which equals $55,410. Your self-employment tax would be 15.3% of $55,410, or $8,478. 

Self-Employment Taxes vs. Payroll Taxes

While self-employment taxes have some unique features for self-employed individuals, it’s not as if these types of taxes came from nowhere. If you’ve been employed, you’ve paid similar taxes, just in a different way.

In an employee-employer relationship, each side pays half of the Social Security and Medicare taxes, which together are often called FICA or payroll taxes. The employee and employer portions are each 7.65% (6.2% for Social Security and 1.45% for Medicare).

Although that means employed individuals pay less directly for these taxes than self-employed individuals, the employer’s share means the total rate is the same. In addition, economists suggest that employee wages would likely be higher if employers did not have to pay their portion of payroll taxes. In that sense, an employee could end up in a similar net financial position as a self-employed individual who pays the full 15.3% rate.

Self-employed individuals can also deduct half the amount they owe in self-employment tax to account for what an employer would have paid. For example, the dog walker who netted $60,000 and owed $8,478 in self-employment tax could deduct $4,239 to reduce their adjusted gross income to $55,761, aside from any other deductions. That can help them save money on income taxes.

How To Pay Self-Employment Taxes

To pay self-employment tax, self-employed individuals typically need to combine these amounts with any income tax owed. They’ll use these amounts to make estimated tax payments, typically four times per year based on quarterly deadlines set by the IRS. For the 2022 tax year, the dates are April 18, June 15, Sept. 15, and Jan. 17, 2023.

You might use last year’s tax return as a guide to estimate how much you’ll owe in estimated tax payments. But if you’re new to self-employment income or have earned much more or less than in previous years, you may want to use Form 1040-ES to calculate your quarterly payments. You may also want to seek guidance from a tax professional. That way, you can reduce the risk of incurring penalties or owing more than you budgeted for when you file your annual return.

Frequently Asked Questions (FAQs)

How much is self-employment tax?

Self-employment tax is a combination of Social Security and Medicare taxes that totals to a rate of 15.3%. Of that, Social Security tax rate is 12.4% (6.2% for the employer and 6.2% for the employee), while Medicare tax accounts for 2.9% (1.45% each for the employer and employee.)

How to calculate self-employment tax?

Self-employment tax is levied on self-employment income of $400 or more. You can calculate self-employment tax at the rate of 15.3% on 92.35% on your net earnings, or the amount left over after any deductions for business expenses.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1.  IRS. “Topic No. 554 Self-Employment Tax.”

  2. IRS. “Self-Employment Tax (Social Security and Medicare Taxes).”

  3.  IRS. “Questions and Answers for the Additional Medicare Tax.”

  4. IRS. "Topic No. 751 Social Security and Medicare Withholding Rates."

  5. Center on Budget and Policy Priorities. “Policy Basics: Federal Payroll Taxes.”

  6. IRS. “2022 Form 1040-ES: Estimated Tax for Individuals,” Page 3.

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