What is self-employment tax?
Self-employment tax (or SE tax) is the Social Security and Medicare tax (health insurance) paid by self-employed individuals. It’s similar to the FICA tax that employers withhold from their employees’ paychecks as payroll taxes. Except no one will deduct it from your pay—business owners are responsible for paying their own self-employment taxes.
Do I have to pay self-employment tax?
Every self-employed person has to pay self-employment taxes on their self-employment earnings of $400 or more. This applies to anyone who is defined as self-employed, even if you’re a senior currently receiving Social Security benefits. The IRS considers you to be self-employed if you are a freelancer, independent contractor, or if you have your own business (sole proprietorship or partnership).
How much is self-employment tax?
The self-employment tax rate is 15.3%, with 12.4% for Social Security and 2.9% for Medicare. However, the Social Security portion may only apply to a part of your business income. That’s because of the Social Security wage base.
For 2023, the Social Security wage base is $160,200. In 2024 that increases to $168,600, again increasing to $176,100 in 2025. This means that in 2024, Social Security tax only applies to the first $168,600 of your earned income from wages and self-employment. After that, you aren’t charged any additional Social Security tax. If your net earnings are greater than $200,000 for single filers or $250,000 for joint filers, you are also subject to a 0.9% increase in Medicare taxes. No matter how much you earn, the Medicare tax applies to all of your wages and self-employment income.
For example, say you have a full-time job earning $170,000 for the tax year. You also have a side hustle making custom party cakes that brings in an additional $20,000 per year. In 2024, your employer withholds Social Security taxes on $168,600 of your wages. Since you’ve already reached the Social Security wage base, you wouldn’t have to pay the 12.4% Social Security portion of self-employment taxes on your side hustle income. You’d only have to pay the 2.9% Medicare portion of self-employment tax.
Additional Medicare tax
High-earning tax filers are also responsible for paying an additional Medicare tax of 0.9% on income above the following thresholds, depending on their filing status:
- Married filing jointly: $250,000
- Married filing separately: $125,000
- All other filing statuses: $200,00
How Bench can help
Dreaming of a world where self-employment taxes are simple and effortless? Wake up—we can help make that dream a reality.
When you sign on with Bench, just connect your bank, credit card, and merchant accounts, and your bookkeeper takes care of the rest. All transactions are automatically imported for categorization and review, so you don’t miss out on a single deduction.
At year end, your bookkeeping team reaches out for a final review call to ensure your information is accurate before producing CPA-approved reports you can use for DIY tax filing or send on to a tax professional. Or, if you want a completely hands off experience, we can even file for you. Learn more about Bench’s small business accounting and tax filing services.
How to calculate self-employment tax
To calculate your self-employment tax, start by finding your net earnings from self-employment. You can calculate your net earnings for tax purposes by subtracting your business expenses from business income. This is generally done by filling out a Schedule C as part of IRS Form 1040, your federal income tax return. Schedule C must be completed by sole proprietors, independent contractors, and other small business owners as part of their tax filing.
If the result is less than the Social Security wage base, the calculation is simple. If your net earnings are more than the Social Security wage base, your calculation will have a few additional steps. You can use our free self-employment tax calculator otherwise we’ll show you how to calculate your tax either way.
If your net earnings are below the Social Security wage base:
Step 1: Figure out your net earnings subject to self-employment tax.
Let’s say your net income from self-employment in 2024 is $100,000. To find the taxable amount, multiply $100,000 by 92.35%. Why 92.35%? Because the 7.65% deduction takes into account the employer-half of your FICA taxes, which the business would deduct if you were paid as an employee.
$100,000 x .9235 = $92,350
Step 2: Calculate your self-employment taxes.
Next, multiply your self-employment taxable income by the 15.3% self-employment tax rate.
$92,350 x .153 = $14,130
Your self-employment taxes are $14,130. We’ve rounded the result because the IRS gives you the option of rounding off cents to whole dollars on your tax return and schedules.
Further reading: How to Calculate Net Income (Formula and Examples)
If your net earnings are above the Social Security wage base:
Step 1: Figure out your net earnings subject to self-employment tax.
Let’s say your net earnings from self-employment were $180,000 for 2024. Only $168,600 of your earnings are subject to Social Security taxes, so we have to add an extra step in the calculation.
Step 2: Calculate your self-employment taxes.
Next, multiply your taxable self-employment earnings by the individual rates for Social Security (12.4%) and Medicare (2.9%).
Total self-employment tax: $20,906 + $4,515 = $25,421
When to pay self-employment tax
If your self-employment income is $400 or more during the year, you are required to pay self-employment taxes and file Schedule SE with your Form 1040, which is generally due by April 15. However, if you expect to owe $1,000 or more in combined income tax and self-employment taxes, you’ll need to make estimated quarterly tax payments.
Estimated payments due dates are typically April 15, June 15, September 15, and January 15 of the following year. Those dates shift to the next business day if the 15 falls on a weekend or holiday.
Self-employed taxpayers can estimate the amount they need to pay using the worksheet on page 8 of Form 1040-ES. These tax forms will help you determine the amount you’ll owe for the year, divide it by four, and pay in equal installments by the due dates mentioned above. The form also includes vouchers to include when mailing your payment. If you prefer to pay online using IRS Direct Pay, you won’t need a voucher (or a stamp).
Is self-employment tax deductible?
When you pay self-employment taxes, you actually get a tax deduction for your federal income tax filing. You can deduct 50% of your self-employment tax bill from your adjusted gross income and decrease the amount of taxes you owe. For example, if you calculate your self-employment taxes to be $2,000, you get a tax deduction of $1,000 of your taxable income. Depending on your tax bracket, this would save you between $100 and $370 on your tax bill.
How to avoid or reduce self-employment tax
Many new business owners cringe at the idea of paying an additional 15.3% of their hard-earned cash into self-employment taxes. The good news is, there are ways to reduce your business tax bill.
- Track all business expenses. Since self-employment taxes are applied to net earnings rather than your gross income, deductible business expenses will reduce your tax liability. Be sure to track and take advantage of all tax deductions (and potential tax credits). Some deductions, like a home office or health insurance, might surprise you.
- Take an above-the-line deduction. The tax code allows self-employed people to deduct half of their total self-employment tax as an above-the-line deduction. This deduction mirrors the employer portion of Social Security and Medicare that would be paid by your boss if you worked for someone else. Take your calculated self-employment tax and divide it in half. The result goes on line 15 of Schedule 1 attached to your Form 1040.
- Make an S-corp election. Some LLC members can reduce their self-employment tax burden by electing to have their LLC taxed like an S corporation. This is because S corp owners pay Social Security and Medicare taxes only on their salary, while LLC members pay self-employment taxes on 100% of their share of the LLC’s profits. However, making an S corp election isn’t right for everyone. Talk to a tax professional to determine whether it’s the right move for you.
—
No one starts a small business because they get excited by the words “small business taxes.” With Bench, you have a personal bookkeeping team to support you every day of the year—not just around tax season. They process your transactions, review your information for accuracy, and are available by message or phone call to talk about your finances. We can even handle your tax preparation. With a subscription, you also get access to unlimited, on-demand consultations for tax advice from a professional who’ll ensure your smoothest tax filing experience yet. Learn more.
