As a salaried or hourly employee, Social Security and Medicare taxes are automatically withheld from their paychecks by their employer. It may not even be something that these workers think about unless they’re looking at a breakdown of the deductions taken from their gross pay.
However, this isn’t the case for people who are self-employed. Among the many other financial responsibilities these individuals have, they also incur an additional self-employment tax to cover these contributions.
In this guide, we’ll answer questions like, “How is tax calculated for self-employed individuals?” and “What taxes do self-employed pay?” to help you feel more confident as you submit your return.
Who Is Required to Pay Self-Employment Tax?
Self-employment tax is required for anyone who works for themselves and nets more than $400 from these activities, according to IRS guidance. This commonly includes individuals who own and run a business as a sole proprietor, are members of a partnership, or work as freelancers or independent contractors for other businesses.
It applies even to individuals who have traditional W-2 employment and collect a regular paycheck, but earn money for themselves through a side gig or passion project. Any money they make on the side that’s above the given threshold is subject to self-employment tax.
For instance, a woman who works as a nurse at a clinic full-time runs an online shop selling items she crochets in her free time. If her shop had a net income of $2,300 for the entire year, she would owe self-employment taxes on this amount.
There is another category of workers who must pay self-employment taxes, which includes anyone who had church employee income greater than $108.28 during a given year.
Self-employment tax applies to people of any age in the United States who are working for themselves. Thus, people are not exempt if they have already begun collecting Social Security benefits.
How Does Self-Employment Tax Work?
Self-employment tax covers a person’s total Social Security and Medicare tax obligations, as they don’t have an employer that would make the contribution on their behalf. Typically, a W-2 worker pays 7.65% of their wages for FICA (Federal Insurance Contributions Act), while their employer matches this by paying another 7.65%. But self-employed people need to cover both portions of this.
This tax is owed on any net earnings a person makes while working for themselves. Sole proprietors and independent contractors typically use Schedule C to determine the net earnings that are subject to this tax, then Schedule SE to calculate the exact self-employment taxes owed.
Importantly, self-employment taxes are separate from the federal and state income taxes that the worker may be subject to. However, they can deduct the “employer” portion of the self-employment taxes to determine their adjusted gross income (AGI), which impacts how much they owe in income taxes.
What are the Self-Employment Tax Rates
So, how much tax do self-employed people pay? It depends on the specific tax bracket that their income qualifies them for, in addition to the self-employment tax they pay on net earnings.
Currently, the self-employment tax rate is 15.3%, which is broken down into two parts:
- 12.4% for Social Security
- 2.9% for Medicare
For the 2024 tax year, the Social Security portion of self-employment tax only applies to earnings of up to $168,600. This threshold will rise for the 2025 tax year to $176,100. However, the 2.9% portion for Medicare applies to all self-employed net earnings, with no upper limit.
How to Calculate Self-Employment Tax (With an Example)
Freelancers, sole proprietors, and independent contractors use Schedule SE (Form 1040) to determine the self-employment tax they owe on net earnings. This form includes a series of steps to help walk individuals through this process.
Here’s a quick example of what this calculation might look like in practice. Let’s say you’re a freelance graphic designer who earned $65,000 in net profit from your business in 2024.
According to IRS guidance, you only pay self-employment tax on 92.35% of your net earnings. Thus, you start by multiplying this rate by your net earnings to determine your taxable income for self-employment:
92.35% * $65,000 = $60,027.5
Then, calculate the Medicare portion, which is 2.9% on uncapped earnings:
2.9% * $60,027.5 =
The next step is to calculate the Social Security portion. Again, this only applies to the first $168,600 of earnings, though this doesn’t come into play in this instance:
12.4% * $60,027.5 =
Adding these two values together gives us the total self-employment tax you’d owe on your 2024 return, in addition to the federal and state income taxes that may apply:
$7,443.41 + $1,740.80 = $9,184.21
Need more guidance than this simple self-employed tax return example? Professional tax accounting services from a qualified team like Bob’s Bookkeepers can help you prepare accurate and timely tax returns.
How to Pay Self-Employment Tax
Calculating the self-employment taxes you may owe is only the first step. You also need to know how to pay them properly to stay compliant and in good standing with the IRS.
Quarterly estimated payments
Self-employed individuals are typically required to make estimated tax payments on their net earnings each quarter. They use Form 1040-ES to do so.
The U.S. tax system follows a “pay-as-you-go” structure, meaning workers must pay their tax liabilities throughout the year as they earn income rather than making one large payment at the end of the year. However, there are certain exemptions that apply to these required payments.
For the 2025 tax year, the deadlines for these quarterly payments are as follows:
- April 15, 2025, for Q1 net earnings
- June 16, 2025, for Q2 net earnings
- September 15, 2025, for Q3 net earnings
- January 15, 2026, for Q4 net earnings
End-of-year filing with the annual tax return
These workers are also required to file an annual income tax return, where they will determine the specific amount of self-employment tax they owe on actual net earnings.
Quarterly tax payments are made on estimated earnings, so there may be some variances in what they actually owe. In other words, they may need to make an additional payment to cover the remaining balance or receive a refund for overpayment.
The typical due date for annual tax returns is April 15 of each year, though this can vary by a day or so depending on weekends and holidays.
Helpful self-employment tax tips
Business owners and independent contractors have an extra tax burden for self-employment. As such, they must stay diligent about setting aside money for these taxes throughout the quarter to ensure they’ll be able to complete the payments on time.
This will make it easier to cover the estimated payments for self-employment tax and help avoid a surprise tax bill at the end of the year. As we’ll discuss below, there are penalties for underpaying self-employment taxes throughout the year or missing the payment deadline altogether.
Each worker must find the system that works best for their financial situation and cash flow needs. However, it can be beneficial to automatically set aside about 15% of all earnings in a dedicated account, so it’s already accounted for and available when the payment is due.
Common Deductions to Lower Self-Employment Tax
Though self-employed individuals are subject to additional tax than traditional W-2 workers, they also have certain avenues to potentially deduct from their taxable income and lower the total amount they end up paying. These are some of the small business tax deductions to consider.
Home office expenses
Self-employed individuals may be able to claim a deduction when they run their business from a room in their home that’s used exclusively for work purposes.
There are certain restrictions and exclusions that apply, and two different ways for self-employed individuals to calculate the deduction amount. One option is to use the actual expenses method, using the exact household expenses multiplied by the portion of the home that’s used for business.
There is also a simplified method, which multiplies the square footage of the home used for business purposes by $5, up to 300 square feet. So, if their home office space is 150 square feet, they’ll be able to deduct $750.
Business-related travel and meals
If the worker must travel to conduct business, they may be able to deduct related expenses for airfare, meals, and other transportation expenses while away from home on business.
Taking deductions for business travel may be enticing to self-employed workers. However, the travel must be considered ordinary and necessary to conduct business in order to qualify for a deduction.
Equipment and software
Freelancers and self-employed professionals may need certain equipment or software systems to conduct business. If so, the cost to purchase or license these tools usually qualifies for a deduction.
Importantly, this only applies to items the business uses in the short term and cannot be depreciated, which is handled differently for tax and accounting purposes.
Health insurance premiums
Since self-employed workers likely don’t have an employee-sponsored health plan they can access for insurance, they must find and pay for their own. The premiums paid for medical, dental, and long-term care insurance may be deductible.
Penalties and Risks of Not Paying Self-Employment Tax
Not paying the required taxes on self-employment income can result in legal penalties and/or fines. The IRS imposes interest on late payments, so it’s recommended that you make all required payments by the filing due date to avoid paying more than what you owe on your earnings.
Simplify Self-Employment Tax with Bob’s Bookkeepers
Calculating taxes on self-employment income can be complex, especially for those who have just started their business or are unfamiliar with U.S. tax codes. Rather than rely on guesswork, small business owners can work with Bob's Bookkeepers to help plan, prepare, and file taxes with confidence.
Our team has worked with small businesses across all industries, from SaaS to fashion. We’re familiar with the types of deductions your business may qualify for. We can help you prepare filings correctly while taking advantage of all applicable credits and deductions to minimize your tax liability.
Whether you’re still wondering, “What can I write off on my taxes as a self-employed worker?” or “What tax form for self-employed is needed?”, we’re happy to help.
Ready to speak with a professional? Contact us today to ask about our tax accounting services.
