Self-Employment Tax: What It Is and How It Works

If you've ever worked a traditional W-2 job, you probably noticed that FICA taxes - Social Security and Medicare - were automatically deducted from your paycheck. Your employer paid half, you paid half, and you never really thought about it. But when you're self-employed, whether you're freelancing, running an Etsy shop, driving for a rideshare company, or doing consulting work on the side, you're responsible for the entire thing. That's self-employment tax, and it catches a lot of people off guard.

Let's walk through exactly how it works, how much you'll owe, and what you can do to minimize the hit.

What Is Self-Employment Tax?

Self-employment tax is the way self-employed individuals pay into Social Security and Medicare. When you work for someone else, your employer covers 7.65% and you cover 7.65%, totaling 15.3%. When you work for yourself, you play both roles, so you pay the full 15.3%.

That 15.3% breaks down into two parts:

• Social Security tax: 12.4% - This applies to net earnings up to the annual wage base limit ($168,600 for 2024). Once your earnings exceed that threshold, you stop paying the Social Security portion.
• Medicare tax: 2.9% - This applies to all net earnings with no cap. If your total income exceeds $200,000 (single) or $250,000 (married filing jointly), you'll also owe an additional 0.9% Medicare surtax on the amount above those thresholds.

Here's the thing that trips people up: self-employment tax is separate from income tax. You owe both. So your total tax burden on self-employment income includes your regular federal and state income taxes plus the 15.3% SE tax. For someone in the 22% federal bracket with a 5% state tax, that can mean a combined effective rate north of 35-40% on side hustle income.

How to Calculate Your Self-Employment Tax

The IRS doesn't apply the 15.3% rate to your total gross income. Instead, they use a specific calculation. Here's the step-by-step process:

1. Calculate your net self-employment earnings. Start with your gross self-employment income and subtract all deductible business expenses. This is the number you report on Schedule C (or Schedule C-EZ) of your tax return.
2. Multiply by 92.35%. The IRS lets you apply the 15.3% rate to only 92.35% of your net earnings, not the full amount. This adjustment exists because employers only pay FICA taxes on employee wages, and the equivalent of the "employer half" is considered a business expense.
3. Apply the 15.3% rate. Multiply the result from step 2 by 0.153 to get your total self-employment tax.

Let's say you earned $50,000 in net self-employment income. Here's how the math works:

• $50,000 x 0.9235 = $46,175 (taxable base)
• $46,175 x 0.153 = $7,065 (self-employment tax)

That's over $7,000 just for SE tax, before income tax even enters the picture. Use the calculator below to see what your actual numbers look like.

The Deduction You Shouldn't Miss

Here's some good news: you can deduct the employer-equivalent portion of your self-employment tax when calculating your adjusted gross income (AGI). That means you can deduct 50% of your SE tax from your income, which lowers your income tax bill (though it doesn't reduce the SE tax itself).

Using the example above, your $7,065 SE tax would give you a $3,533 deduction on your income tax. If you're in the 22% bracket, that saves you about $777 in income taxes. It's not huge, but it's something. This deduction is claimed on Schedule 1 of your Form 1040, and you don't need to itemize to take it.

Quarterly Estimated Tax Payments

When you're self-employed, you can't just wait until April 15 to pay everything you owe. The IRS expects you to pay taxes throughout the year through quarterly estimated payments. The due dates are:

• Q1: April 15 (for income earned January through March)
• Q2: June 15 (for income earned April through May)
• Q3: September 15 (for income earned June through August)
• Q4: January 15 of the following year (for income earned September through December)

Notice those quarters aren't equal in length. Q2 only covers two months while Q3 covers three. Don't ask why - the IRS has its reasons.

If you underpay your quarterly estimates, you may owe an underpayment penalty. The safe harbor rule says you can avoid penalties by paying either 100% of last year's total tax liability or 90% of this year's liability, whichever is smaller. If your AGI was over $150,000 last year, the safe harbor threshold bumps up to 110% of last year's tax.

The simplest approach: take your expected annual self-employment tax plus income tax, divide by four, and send that amount each quarter using Form 1040-ES. You can pay electronically through IRS Direct Pay or the EFTPS system.

See Your Full Tax Picture

Self-employment tax is just one piece of your total tax bill. Use the tax calculator below to see how your SE income affects your overall federal tax liability, including income tax brackets.

Common Business Deductions That Lower Your SE Tax

Since self-employment tax is calculated on your net earnings, every legitimate business deduction you take directly reduces your SE tax. Here are some of the most common deductions for self-employed individuals:

• Home office deduction: If you use a dedicated space in your home exclusively for business, you can deduct a portion of your rent or mortgage, utilities, and insurance. The simplified method lets you deduct $5 per square foot, up to 300 square feet ($1,500 max).
• Vehicle expenses: If you drive for business, you can deduct either actual expenses (gas, insurance, repairs) or use the standard mileage rate (67 cents per mile for 2024).
• Health insurance premiums: Self-employed individuals can deduct 100% of health insurance premiums for themselves and their families, provided they aren't eligible for employer-sponsored coverage through a spouse.
• Retirement contributions: Contributions to a SEP IRA, SIMPLE IRA, or solo 401(k) are deductible. A SEP IRA lets you contribute up to 25% of net self-employment earnings (up to $69,000 for 2024).
• Software and tools: Any software, equipment, or subscriptions used for your business are deductible.
• Professional development: Courses, books, and conferences related to your business.

Self-Employment Tax When You Also Have a W-2 Job

If you have a day job and a side hustle, things get a little more nuanced. Your W-2 wages already have Social Security tax withheld up to the wage base limit. Your combined W-2 wages and net self-employment earnings are used to determine whether you've hit that cap.

For example, if your W-2 job pays $140,000 and your side hustle nets $40,000, your combined earnings are $180,000. Since the Social Security wage base is $168,600, you'd only owe the 12.4% Social Security portion on the first $28,600 of your self-employment income (the amount needed to reach the cap). You'd still owe the 2.9% Medicare tax on all of your self-employment earnings.

This is actually a benefit of having a high-paying W-2 job alongside self-employment income - you may not owe the full 15.3% on all your side hustle earnings.

Record-Keeping Tips

Good record-keeping isn't just nice to have - it's essential for surviving an audit and for maximizing your deductions. Here's what you should track:

• Keep all receipts for business expenses (digital copies are fine)
• Maintain a separate bank account and credit card for business transactions
• Track mileage in real time using an app (reconstructing it later won't hold up in an audit)
• Save all 1099 forms you receive from clients
• Document your home office measurements and usage

The Bottom Line

Self-employment tax is one of the biggest surprises for new freelancers and side hustlers. The 15.3% rate on top of regular income tax can take a serious bite out of your earnings. But understanding how it works puts you in control. Maximize your business deductions, make your quarterly payments on time, take advantage of the 50% AGI deduction, and consider retirement account contributions to lower your taxable base. The tax burden is real, but it's manageable when you plan for it.