Self-employment tax covers Social Security and Medicare at 15.3% on net earnings exceeding $400, with deductions reducing taxable income. Payments are made quarterly, and half the tax is deductible, ensuring compliance with IRS regulations.
By Brad Nakase, Attorney
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People who are self-employed are required to pay taxes on both their income and their self-employment.
It is highly probable that you will be required to pay federal self-employment taxes if you are self-employed, whether it’s your primary source of income or a side hustle. On the other hand, you will still be liable for federal income tax even after deducting self-employment taxes.
Why? Because there is a difference between the two taxes. More often than not, you’ll be on the hook for both if you’re your own boss. Your tax liability may be lower or even eliminated (in the instance of income tax) depending on your specific situation, including your filing status, income, and other relevant factors.
Let’s put ourselves in the shoes of a self-employed person and examine the income tax and the self-employment tax more closely. You should be aware of the potential effects of these two taxes on your income if you are self-employed.
Like the Federal Insurance Contribution Auth (FICA) taxes withheld from an employee’s paycheck, the self-employment tax is a unique tax on your net earnings from self-employment. It’s a way for self-employed people to contribute to Medicare and Social Security. When you’re self-employed, your net earnings are the money you make after deducting all of your business-related expenses from your total income. For the 2024 tax year, it is generally necessary to pay the tax if your net self-income is $400 or more.
Like the Federal Insurance Contribution Auth (FICA) tax, the Social Security tax and the Medicare tax comprise the self-employment tax. The overall tax rate for self-employment is 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare. People who work for themselves are responsible for paying the entire 15.3% of the self-employment tax, in contrast to employees and employers who each pay 7.65% of the FICA tax.
Some rules reduce the amount of tax that self-employed people have to pay. As an example, you won’t have to pay taxes on 7.65% of your net income if you work for yourself. So, 92.35% of your net earnings (100 percent minus 7.65%) are subject to taxation. Businesses can deduct 7.65% of employee wages from their taxable income thanks to this exemption, which is similar to the business expense deduction.
And while the Medicare tax does not have a comparable ceiling, once your earnings, tips, and self-employment income reach a specific threshold, the remaining portion of your income is exempt from the Social Security tax. The cutoff, or Social Security wage base, for the 2024 tax year is $168,600 ($176,100 for 2025).
You can figure out your self-employment tax using Schedule SE, and then include it in your federal income tax when you file your 1040 form each year. Nevertheless, if you’re like the majority of self-employed individuals and pay your estimated taxes on a quarterly basis, then you should be able to deduct a portion of your self-employment tax from each payment. So, after all your quarterly payments are deducted, the portion of your federal income tax bill that is due for the self-employment tax should be paid in full, if not already paid in full.
For individuals who are self-employed, the Social Security tax is 12.4% of their income, which is then divided evenly between what would normally be the employer’s share and the employee’s share, which comes to a total of 6.2% for each.
In 2023, self-employment income up to $160,200 is exempt from the Social Security tax; in 2024, that number rises to $168,600.
The Medicare tax is also charged at a rate of 2.9%, and it is equally distributed between the contributions made by the employer and those made by the employee (1.45% each). Furthermore, there is no limit on the amount of income that is subject to this tax.
With 12.4% plus 2.9%, the overall rate for self-employment is 15.3%.
If you’re self-employed, you can lower your taxes by taking advantage of two income tax deductions. You can directly deduct 7.65% of the total 15.3% self-employment tax rate from your income, which is half of the tax.
Following the same logic as employees, whose employer contributions to Social Security are not considered wages, the first step in calculating your net self-employment income is to deduct half of your total Social Security tax.
The next step is to use IRS Form 1040 to deduct half of your Social Security tax. You don’t need to keep track of individual deductions like this; they’re all part of determining your adjusted gross income. It doesn’t belong on your Schedule C.
Taxes are not automatically withheld from the paychecks of self-employed people. Consequently, in order to pay their federal, state, and FICA taxes, they must make quarterly estimated tax payments.
The CARES Act, which allowed employers to postpone paying some of their self-employment taxes, is no longer in effect. For the period beginning on March 27, 2020 and ending on December 31, 2020, the act postponed the payment of the employer portion of the taxes that are directly owed to Social Security by self-employed individuals. Half of those taxes were postponed until December 31, 2021, and the other half until December 31, 2022.
Instead of using the full 100% of their net earnings, self-employed individuals usually use 92.35 percent when calculating their self-employment tax.
If a person’s human resource consulting business brings in a net income of $200,000 in 2024 after deducting all of their expenses, then the amount of self-employment tax that they are required to pay is calculated based on 92.35% of that amount, which is equal to $184,700. They would have to adjust this amount to determine their self-employment tax because it exceeds the Social Security tax cap. On $184,700, you would owe a total of $23,063.50 in self-employment taxes:
($142,800 x 12.4%) + ($184,700 x 2.9%)
Total: $23,063.50 ($17,707.20 + $5,356.30)
They are eligible to deduct half of their self-employment tax, which is $23,063.50 ÷ 2, or $11,531.75, when they submit their income tax return. Essentially, they are able to deduct the 7.65% employer portion of their self-employment tax, which includes 6.2% Social Security and 1.45% Medicare.
Taxpayers who are self-employed, have a small business, or work for a freelance company are required to file a Form 1040 Schedule SE with the Internal Revenue Service in order to contribute to Social Security and Medicare. People who work for themselves are liable for paying half of the FICA taxes because the Internal Revenue Service views them as both an employer and an employee. Your total self-employment tax will be 15.3%; 12.4% will go toward Social Security on earnings up to your taxable earnings limit, and 2.9% will go toward Medicare regardless of your income.
It is mandatory to pay Social Security and Medicare taxes, also called FICA taxes, on any income that exceeds $400 per year from self-employment, whether it’s a side gig selling things on Etsy or helping out neighbors. In addition to being required by law for self-employed individuals, these taxes will go toward funding your future Medicare and Social Security benefits.
From 1990 to the present, the Social Security tax rate has remained at 6.2%.
In order to fund more people getting health insurance, the Affordable Care Act of 2010 brought a 0.9% increase for high-income earners to the Medicare tax rate, the most recent major change to the program.
When you have multiple sources of income, including wages from a company and earnings from self-employment, the Social Security tax on your job’s wages is paid first. This can be useful in reducing your self-employment tax liability if your total income from both sources is higher than the annual Social Security wage base.
Take 2024 as an example; you could earn $100,000 from a regular job and $69,600 from a side gig, for a grand total of $169,600. Your employer contributes half of the Social Security tax that is a component of FICA, and you are required to pay half of it out of your paycheck, for a total of $100,000 in wages. Nevertheless, you will only be required to pay the Social Security tax component of your self-employment tax on $68,600 of your self-employment income ($168,600 – $100,000= $68,600) for the 2024 tax year, as this is the amount that is subject to taxation.
If your total self-employment income in 2024 is more than the Social Security wage base ($169,600 – $168,600 = $1,000), then you will not be required to pay Social Security taxes on that income. Since there is no cap on the amount of income from employment that is subject to the Medicare tax, the 2.9% tax will still apply to the remaining $1,000.
There is the possibility of an extra 0.9% Medicare tax for individuals with higher incomes who are self-employed. These taxes are distinct from Medicare taxes, which are a component of self-employment taxes (or the FICA tax), despite their close relationship.
Wages, income from self-employment, or railroad retirement compensation that surpasses the following amounts are typically subject to the additional tax:
To determine the extra Medicare tax, fill out Form 8959.
Your yearly income is subject to taxation under the federal personal income tax, as the name implies. Funds, real estate, products, or services can all be considered forms of income. As a general rule, if your gross income for the year exceeds your Standard Deduction, you are required to file a federal income tax return and pay any tax that is due.
Not all income is subject to taxes; some forms of income are specifically exempt. Wages, retirement funds, Social Security benefits, tips, capital gains, bonuses, company profits (including self-employment), canceled debt, prizes, gambling winnings, court awards, and many other forms of income are taxable. (The various forms of income and their tax status are detailed in IRS Publication 525.)
But before you figure out how much income tax you have to pay, you can determine your taxable income by deducting any eligible expenses from your total income. This includes both standard deduction and itemized deductions.
You can determine your annual income tax due by adding the applicable federal income tax rates to your taxable income. If you live in the United States, your income tax bill will be based on marginal tax rates. Here are the current rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Also, the rates are progressive, so as your taxable income goes up, so does your marginal tax rate.
After that, if you are eligible to receive a tax credit, it will lower your income tax. To get your taxable income, deduct all taxes paid this year, whether via withholding or estimated payments. You can expect a tax refund if the sum of your paid taxes and any applicable credits exceeds your tax liability. If not, you’ll need to include the outstanding amount in your tax return payment.
The tax rate applied to the final dollar of your taxable income is known as your “marginal tax rate.” Put another way, it’s the maximum tax rate that you’re subject to. The rate at which you pay taxes depends on your filing status and taxable income; this in turn determines your tax bracket.
Your marginal tax rate does not apply to all of your taxable income, though, unless your tax bracket is the lowest (10%). A portion of it will be subject to reduced tax rates. This is due to the fact that the tax rate is proportional to the income bracket in which it falls.
For the 2024 fiscal year, a single individual with $50,000 in taxable income would fall into the 22% tax bracket. Your effective marginal tax rate, then, is 22%. But $22% of $50,000 isn’t $11,000 in taxes. Rather, your annual tax liability is proportional to the amount of taxable income that is subject to each tax bracket.
There would be a 10% tax on the first $11,600 ($1,160), a 12% tax on the next $11,601 to $47,150 ($4,266), and a 22% tax on the next $47,151 to $50,000 ($6,27). Instead of paying $4,947 more in taxes ($1,160 + $4,266 + $627 = $6,053), you can pay $4,947 less by dividing your taxable income by the total amount ($11,000 – $6,053 = $4,947).
You must “pay as you go” for federal income taxes. If you have a tax bill for the year, you can’t pay it all at once; instead, you have to spread it out over the year in the form of estimated payments.
When other forms of payment to the IRS, like withholding from paychecks or other sources of income, fall short of covering a taxpayer’s expected tax liability for the year, the taxpayer is required to make estimated tax payments. This is common for those who work for themselves, since their income from self-employment is not usually subject to withholding taxes.
Due four times a year, or approximately (but not precisely) once every calendar quarter, the estimated tax payments are commonly known as “quarterly” tax payments.
If you don’t pay enough at the end of the year, you might have to pay interest and penalties to the IRS when you file your taxes.
The majority of states have their own income tax system that is separate from the federal government. Nine states do not impose any income tax. Additionally, some municipal and county governments levy income taxes.
A federal income tax return and a state income tax return will often appear very similar. Tax rates, deductions, and credits will vary, among other significant differences. Additionally, your federal taxable income or adjusted gross income is usually the starting point for determining your state income tax liability. In most cases, you should finish your federal taxes first, and then go on to your state returns.
In most cases, you can claim state and local taxes as a tax deduction on your federal income tax return. There is a $10,000 annual cap on state and local tax deductions, and itemizing is required to claim them. You can substitute your sales taxes for your state and local income taxes if you pay more in sales taxes than income taxes or if you reside in a state without income taxes.
Although the United States government collects both federal income taxes and self-employment taxes, there are numerous significant differences between the two that affect individuals who are self-employed. Let’s talk about some of the most important differences.
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