For a self-employed individual, tax season can present challenges, leaving many independent workers and sole proprietors looking for guidance to handle their taxes. In this guide, you’ll learn to navigate the world of self-employment taxes, including explanations of rates, calculations, and how to stay compliant with tax laws to avoid IRS headaches — plus all the information you need to pay what you owe and not a penny more.
To help us better understand how these taxes work, we spoke with Tom Brock, a licensed CPA, and CFA Charterholder, with over a decade of experience helping small businesses. His insights are included throughout this article.
What is self-employment tax?
Per the Federal Insurance Contributions Act (FICA) of 1935, which was enacted to fund the Social Security and Medicare programs, workers must pay a tax on earned income and employers must pay a matching tax.
Expert perspective
“For self-employed workers, this results in a double tax – one as the employee and one as the employer. Fortunately, allowances exist that can reduce the tax obligation to a level that compares to the one imposed on traditional employees.”
— Tom Brock, Certified Public Accounting (CPA) and Chartered Financial Analyst (CFA)
With a traditional employment model, an employer pays an employee for work. Typically, the employee’s Social Security and Medicare taxes are automatically withheld from each paycheck, and the employer’s matching taxes are periodically remitted to the IRS.
With self-employment, you are responsible for remitting the entirety of the Social Security and Medicare taxes associated with your earned income. Generally, this entails calculating estimated taxes and making quarterly payments. Then, at year-end, you determine your actual self-employment tax using Schedule SE, which is filed along with your Form 1040 or Form 1040-SR.
Self-employment tax rate
The self-employment tax rate is 15.3 percent – 7.65 percent for the employee portion and 7.65 percent for the employer portion. The 15.3 percent reflects a 12.4 percent levy for Social Security and 2.9 percent levy for Medicare.
“Fortunately, you only pay self-employment tax on your net earnings, which means you can first subtract any deductions, including business expenses, from your gross earnings. Furthermore, the self-employment tax is only due on 92.35 percent of your net earnings – an allowance designed to put self-employed persons on par with traditional employees. Essentially, it enables self-employed persons to avoid paying the employer’s 7.65 percent of the FICA tax. (100 percent less 7.65 percent equals 92.35 percent).”
— Tom Brock, Certified Public Accounting (CPA) and Chartered Financial Analyst (CFA)
Additionally, the Social Security portion of the self-employment tax, 12.4 percent, only applies to the first $168,600 of your net earnings (the first 176,100 of net earnings for 2025). Any income beyond this threshold is only subject to the Medicare tax of 2.9 percent. Since 2013, there has been an additional 0.9 percent Medicare surtax on income over a certain threshold. Currently, the threshold is $200,000 for single individuals and heads of households, $250,000 for married couples filing jointly and $125,000 for married couples filing separately.
Self-employment tax deductions: How to reduce self-employment tax?
The self-employment tax rate is high. Fortunately, as noted above, the IRS allows you to subtract the employer’s portion of the 15.3 percent from income before determining the self-employment tax.
The IRS also allows you to deduct 50% of your self-employment tax on your federal income tax return. Beyond this, there are a number of other tax deductions you can take to reduce your income tax obligation. The most prominent deductions are outlined below.
- Home office – This deduction consists of the cost of any workspace expenses you incur regularly and exclusively for your business. It includes a portion of your rent or home depreciation, utilities, property insurance and repairs and maintenance expenses. The primary qualification for the deduction is that the home office is the principal place of business.
- Health insurance premiums – If you are self-employed, pay health insurance premiums and are not eligible to participate in a plan through your spouse’s employer, you can deduct all of your qualified health, dental and long-term care insurance premiums. Additionally, certain medical and dental expenses above 7.5% of your adjusted gross income may be tax deductible. The Small Business Jobs Act (Searchable PDF file), Section 2042, offers additional insight into this deduction.
- Other expenses – In many cases, you may have deductions available that relate to a host of other business-related expenses, including liability insurance, advertising, travel, education/training, subscriptions, and charitable contributions.
- Retirement savings contributions – Making contributions to an IRS-sponsored retirement account is another way to capture significant self-employed tax deductions. The most commonly used savings vehicles include individual retirement accounts (IRAs), solo 401(k) accounts, and simplified employee pensions.
Next, we asked Tom if he could explain a deduction that tends to trip people up.
What is the 20% self-employment deduction?
The 20% self-employment deduction, which is commonly referred to as the qualified business income deduction, allows eligible owners of sole proprietorships, partnerships, S corporations and some trusts and estates to deduct up to 20 percent of qualified income plus 20 percent of qualified real estate investment trust dividends and qualified publicly traded partnership income. Income earned through a C corporation or by providing services as an employee is not eligible for the deduction.
The IRS specifies a number of complex rules, limitations and exclusions for the deduction. As a result, it generally makes sense to consult with a tax professional when claiming this deduction.
Moving on, it’s time to discuss who actually needs to pay these taxes.
Who must pay self-employment tax?
If you’re self-employed and earn more than $400 net per year, you must pay the self-employment tax. Even as a church employee, if you earn more than $108.28, you must pay taxes.
When choosing a business entity type, if you opt for a sole proprietorship or independent contractor status, you can use a Schedule C form to figure out your net earnings from self-employment. Remember, only 92.35 percent of your net earnings are subject to the self-employment tax.
Family caregivers and the self-employment tax
Caregivers are people who perform in-home services for older and disabled individuals. They typically pay a slightly different self-employment tax, because they are considered employees of the people they serve. To learn more about how the tax differs for these individuals, check out the IRS guide for family caregivers and the Household Employer’s Tax Guide.
For those who are self-employed, there may be questions about whether or not there’s ways to mitigate self-employment taxes to a certain extent. Once more we caught up with Tom for his two cents.
Can you avoid self-employment tax with an LLC?
The owner of a single-member limited liability company (LLC) is considered a self-employed individual. This means he or she is subject to the same self-employment tax on net earnings as a sole proprietor.
“However, an LLC has the option of filing its taxes as an S corporation, which passes all income tax obligations to its members. With an S corporation, the owner of an LLC can be considered an employee and receive a salary. Self-employment taxes only have to be paid on the salary; the rest of the entity’s profits can be distributed to members as dividends, which are not subject to the self-employment tax.”
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Tom is quick to point out this comes with caution. “Please note, to employ the strategy above, you must elect to be taxed as an S corporation, and your LLC should have more than one member,” Tom explains. “Many small businesses opt to make a trusted lawyer, CPA, or fiduciary financial advisor the second member of the LLC. Naturally, this entails implementing appropriate contractual limitations for the second member.”
With the self-employment tax explanations under our belts, it’s time to roll up our sleeves and dig into how calculating it works.
Calculation of self-employment tax
Calculating the self-employment tax is unfamiliar to most individuals, because it happens automatically for traditional employees that receive a paycheck. Fortunately, the computation isn’t overly complex and the standard annual tax forms walk you through it.
As outlined below, calculating the tax entails a straightforward five-step process.
- Figure out your net earnings: Your self-employment net earnings include any income from freelance work, gig jobs, and your business. You want to subtract any business expenses that qualify for a deduction; a Schedule C form can help you calculate net profits.
- Multiply your net income by 92.35 percent: Because you only pay self-employment tax on 92.35 percent of your earnings, you need to multiply the figure by 0.9235. The total is the amount subject to the 15.3 percent tax.
- Multiply the result by 12.4 percent: To find the Social Security portion of the tax, you must multiply 0.124 by your net income — the total from step two — up to $168,600 ($176,100 for 2025).
- Multiply the result of step 2 by 2.9 percent: You have to pay the Medicare portion of the tax on your earnings, whether or not they exceed $168,600. Multiply the result of step two by 0.029.
- Add the results of steps 3 and 4 together: To get the total dollar amount of your self-employment tax, add the results of steps three and four.
To see this process in action, consider the following example:
Julia made $72,000 from her writing and editing business, and she had no deductible business expenses. She wants to calculate her self-employment tax for the year. First, she multiplies $72,000 by 0.9235, which results in $66,492 of net taxable income.
Next, she determines the Social Security portion by multiplying $66,492 by 0.124, which results in $8,245.01. Then, she multiplies $66,492 by 0.029 to calculate the Medicare portion, arriving at $1,928.27.
Finally, she adds the Social Security and Medicare portions to determine her total FICA obligation. – Julia owes self-employment taxes of $10,173.28.
How much should I put away for taxes if I am self-employed?
If you are self-employed, a conservative rule-of-thumb is to set aside 30 percent of your gross earnings for taxes. This should cover your federal, state and local income taxes and the non-deductible portion of your self-employment tax. The exact amount depends on your income level, deductions, credits and state and local tax rates.
Incidentally, if you expect to owe more than $1,000 for federal income tax, you are required to pay quarterly tax estimates to the IRS. You can use Form 1040-ES to calculate your payments.
How do I pay self-employment tax?
Now that you have figured out how much you owe in self-employment taxes, it’s time to pay up. Before you can file and pay your taxes, you must have a Social Security number (SSN) or an individual taxpayer identification number (ITIN).
A SSN is a unique nine-digit number that the Social Security Administration assigns to all U.S. citizens, permanent residents, and eligible nonimmigrant workers. It is an identification number for tracking earnings and contributions to Social Security.
An ITIN serves the same purpose as an SSN but is only available for certain nonresident and resident aliens, including their spouses and dependents who can’t get an SSN. It is also a nine-digit number but always begins with the number nine.
You can apply for an SSN by using Form SS-5 or going to the Social Security Administration’s website. If you are a nonresident or resident alien, you can apply for an ITIN by filling out and filing Form W-7. Once you have the proper identification, you can file and pay your self-employment tax.
Filing self-employment taxes
In most situations, self-employed individuals must pay estimated quarterly taxes. The quarterly estimates help reduce the burden of paying a large lump sum of annual taxes, because self-employed filers don’t have taxes automatically taken from their pay. You can learn more by reviewing the IRS’s estimated taxes page or its Tax Withholding and Estimated Tax guide.
You will typically have to fill out a Schedule C to show your net earnings from self-employment and a Schedule SE to figure the self-employment tax. Because these forms can get confusing, it is best to consult a tax professional when filing.
What kinds of jobs are exempt from paying the self-employment tax?
If you are self-employed, regardless of the nature of your business, you must pay self-employment tax on any income over $400. The only people exempt from this are workers classified as employees who receive a W-2. If you own your own business and pay yourself an owner’s draw or salary, the tax rules might be a little different; therefore, seek professional guidance.
Make sure managing self-employment taxes is on your to-do list
Whether you are an independent contractor or a sole proprietor with a few employees, paying self-employment tax is an important aspect of managing your income and expenses while avoiding unwanted attention from Uncle Sam. Fortunately, you have resources at your disposal. Check out online payroll providers like OnPay and see how they can help ensure your contributions to Medicare and Social Security funds remain current.
Best of luck as you grow your business, and we are here to help!
