How Self‑Employment Tax Works: Calculation, Examples, and Planning

Key Takeaways

Self‑employment tax funds Social Security and Medicare; you pay both the employee and employer portions (generally 15.3%).
You compute it on 92.35% of net earnings using Schedule SE; income tax is separate but you can deduct half of SE tax in computing AGI.
Thresholds matter: Social Security has a wage base; Medicare has no cap and may trigger an additional 0.9% at higher incomes.
Record‑keeping, quarterly estimates, and smart deductions help you stay compliant and avoid penalties.

What Is Self‑Employment Tax?

Self‑employment tax covers Social Security and Medicare contributions for people who work for themselves—sole proprietors, independent contractors, freelancers, and gig workers. Employees split these taxes with their employers; when you’re self‑employed, you’re responsible for both halves.

What It Funds

• Social Security benefits
• Medicare hospital insurance

Why It Exists

To ensure self‑employed workers contribute equitably even without an employer.

Components & Rates

Social Security: Generally 12.4% up to the annual wage base. Earnings above the base aren’t subject to this portion.

Medicare: 2.9% on all net earnings (no wage base cap). Additional Medicare Tax of 0.9% can apply above certain income thresholds.

Component	Rate	Applies To	Notes
Social Security	12.4%	Up to wage base	Above base is not subject
Medicare	2.9%	All net earnings	No cap
Additional Medicare	0.9%	Earnings above threshold	Varies by filing status

Quick Reference

• Combined base rate: 15.3% on 92.35% of net earnings
• Additional Medicare: 0.9% above income thresholds

Who Pays Self‑Employment Tax?

Most individuals with net earnings from self‑employment of $400 or more owe self‑employment tax. This includes contractors, freelancers, side‑gig earners, and sole proprietors. Certain church employee earnings may also be subject when above specific thresholds.

How to Calculate It (Schedule SE)

Determine net earnings: Business income minus allowable business expenses.
Multiply by 92.35%: This approximates the employee‑portion deduction used in the calculation.
Apply rates: Social Security up to its wage base, plus Medicare on all earnings; add Additional Medicare if applicable.
Income tax interaction: You can deduct half of your self‑employment tax when computing AGI (this doesn’t reduce SE tax itself).

Examples

Mid‑Income Freelancer

You earn $60,000 and have $10,000 of ordinary and necessary expenses. Net earnings are $50,000. Compute SE tax on 92.35% of $50,000.

92.35% × $50,000 = $46,175 → 15.3% applies within Social Security’s wage base plus Medicare. You may deduct half of the SE tax in computing AGI.

Higher Earnings with Wage Base

At $200,000 of net earnings, Social Security applies only up to its wage base; Medicare applies to all $200,000. Add Additional Medicare if thresholds are exceeded.

Additional Medicare Illustration

If net earnings are $250,000 and you’re single, compute Medicare on $200,000, then apply 0.9% Additional Medicare on $50,000 above the threshold.

Detailed Computation Walkthrough

1) Net earnings: Tally gross receipts and subtract ordinary and necessary business expenses.
2) 92.35% factor: Multiply net earnings by 0.9235. This step approximates the employer‑share adjustment used in SE tax math.
3) Apply Social Security: Use the wage base limit for the year; amounts above the base aren’t subject to Social Security.
4) Apply Medicare: 2.9% on the full SE base; consider the 0.9% Additional Medicare above thresholds.
5) Deduct half of SE tax in AGI: This reduces income for income‑tax purposes, but it doesn’t change the SE tax owed.

Managing Self‑Employment Tax

Make Quarterly Estimates: Avoid penalties by sending timely estimated payments. See our quarterly payments guide.
Keep Excellent Records: Track revenue and expenses, save receipts, and reconcile accounts monthly.
Use Deductions Wisely: Consider home office, business travel, health insurance, and other ordinary and necessary expenses.

If you’re facing back taxes or penalties, relief options exist. Explore Back Tax Relief, Penalty Abatement, or Audit Representation.

Quarterly Estimate Planner

Quarter	Period	Typical Due
Q1	Jan–Mar	April 15
Q2	Apr–May	June 15
Q3	Jun–Aug	September 15
Q4	Sep–Dec	January 15 (next year)

High‑Value Deductions to Review

• Home office (exclusive and regular use)
• Health insurance premiums (self‑employed)
• Retirement plan contributions (e.g., SEP‑IRA, Solo 401(k))
• Vehicle and travel (substantiated mileage or actual costs)
• Supplies, software, professional fees, advertising

Common Scenarios

• Side‑gig + W‑2 job: Employer already withholds FICA on W‑2 wages; you still owe SE tax on net self‑employment earnings.
• Seasonal spikes: Consider adjusting estimates mid‑year to reflect actual income swings.
• Late filer: File even if you can’t pay to avoid the larger failure‑to‑file penalty, then seek a plan or penalty relief.
• Multi‑state work: Keep clear records of where income is earned and coordinate with state filings to prevent notices.
• New business year: Revisit estimates and withholding after major changes (pricing, client volume, capital purchases).

Why These Payments Matter

Your contributions build eligibility for Social Security and support Medicare coverage later in life. Staying compliant today protects your benefits tomorrow.

Frequently Asked Questions

Do I owe SE tax if I had a loss?

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If your net earnings are zero or negative, there’s no SE tax. Track and carry forward losses per tax rules.

Where do I enter SE tax on my return?

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Use Schedule SE and Schedule 1 (for the deduction). The tax ultimately flows to your Form 1040.

How do W‑2 wages interact with SE tax?

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Your employer withholds FICA on W‑2 wages. You still calculate SE tax on your net self‑employment earnings separately.