What freelancers and business owners need to know
Self-employment tax is basically Social Security and Medicare tax for people who work for themselves. When you're an employee, your employer pays half and you pay half. When you're self-employed, you pay both halves.
The rate: 15.3% on your net self-employment income (that's 12.4% for Social Security + 2.9% for Medicare)
When you're a W-2 employee, you might notice these deductions on your pay stub:
Social Security: 6.2% (you) + 6.2% (employer) = 12.4% total
Medicare: 1.45% (you) + 1.45% (employer) = 2.9% total
When you're self-employed, there's no employer to pay the other half—so you pay the full 15.3% yourself. That's self-employment tax.
Here's the step-by-step:
Self-employed people get some tax breaks to help offset the SE tax:
You can deduct 50% of your self-employment tax from your income. This reduces your income tax (though not your SE tax itself).
The Qualified Business Income deduction lets you deduct up to 20% of your business income. Learn more about QBI →
If you pay for your own health insurance, you can deduct 100% of the premiums.
SEP IRAs and Solo 401(k)s let you save for retirement and reduce your taxable income. Learn more about SEP IRAs →
High earners pay an extra 0.9% Medicare tax on self-employment income above:
Unlike W-2 employees who have taxes withheld each paycheck, self-employed people need to pay estimated taxes quarterly. If you don't, you could face penalties.
Disclaimer
This article is for informational and educational purposes only and does not constitute tax advice. Self-employment tax rules can be complex. Consult a qualified tax professional for advice specific to your situation.