Self-Employment Tax: What You Need to Know

Navigating taxes can feel overwhelming, especially if you’re self-employed and managing everything on your own. 

Unlike traditional employees, whose income taxes are automatically withheld from their paychecks, self-employed individuals are responsible for handling their own tax obligations. 

This guide walks you through the essentials of self-employment tax, from understanding who needs to pay it to tips for managing it effectively.

What is self-employment tax?

It’s important to understand that self-employment tax is separate from income tax. 

Income tax is based on your total taxable income and takes into account deductions, credits, and your tax bracket. Self-employment tax, on the other hand, is specifically for Social Security and Medicare contributions. Both taxes are calculated differently but must be paid simultaneously.

Who needs to pay self-employment tax?

If you’re self-employed, you’re generally required to pay self-employment tax. This includes anyone earning income as a sole proprietor, freelancer, independent contractor, or partner in a business. If you work for yourself and generate income, the IRS expects you to pay self-employment tax.

One important thing to note is the income threshold. If you earn $400 or more in net self-employment income during the year, you must pay self-employment tax. For church employees, the threshold is slightly lower at $108.28. Meeting these thresholds means you’re responsible for covering both the employee and employer portions of Social Security and Medicare taxes.

How is self-employment tax calculated?

Self-employment tax is based on your net earnings, which is your income after deducting allowable business expenses. This calculation ensures you’re taxed only on the money you got to keep — what was left of your business income after you paid your business expenses — not your gross income.

Current self-employment tax rates

The self-employment tax rate is 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare. If your net earnings exceed $200,000 (or $250,000 for married couples filing jointly), an additional 0.9% Medicare tax applies.

Deductions available for self-employed individuals

One of the perks of being self-employed is access to deductions that can lower your taxable income. Here are some of the most common deductions.

Self-employment tax deduction

You can deduct 50% of the self-employment tax you pay. This reduces the impact of covering both the employee and employer portions of Social Security and Medicare taxes.

Home office deduction

If you use part of your home exclusively for business, you can deduct related expenses such as rent, mortgage interest, utilities, and maintenance costs.

Business supplies and equipment

Items like office supplies, computers, printers, and software necessary for running your business can be deducted.

Travel expenses

Costs for business-related travel, including airfare, lodging, rental cars, and meals, are deductible. Ensure these expenses are exclusively for business purposes.

Vehicle expenses

If you use your car for business purposes, you can deduct either the standard mileage rate or the actual costs of operation, such as gas, insurance, and maintenance.

Health insurance premiums

Self-employed individuals can deduct the cost of health, dental, and long-term care insurance for themselves, their spouse, and dependents.

Retirement contributions

Contributions to retirement accounts like a SEP IRA, SIMPLE IRA, or Solo 401(k) are deductible, helping you save for the future while lowering your taxable income.

Professional services

Fees paid to accountants, attorneys, or consultants for services directly related to your business are deductible.

Education and training

Costs for courses, certifications, or seminars that improve your skills or knowledge in your field can be deducted.

Advertising and marketing

Expenses for promoting your business, such as website development, digital advertising, and business cards, are deductible.

Internet and phone services

The portion of your internet and phone bills used for business purposes can be deducted.

Business insurance

Premiums for business-related insurance, such as general liability, professional liability, or commercial property insurance, are deductible.

Membership fees

Costs for joining professional organizations, industry associations, or networking groups are deductible if they relate directly to your business.

Interest on business loans

Interest paid on loans or credit cards used for business purposes is deductible.

Depreciation of assets

If you purchase equipment or property for your business, you may be able to deduct the cost over several years through depreciation.

Keeping detailed records of your expenses is essential to ensure you claim all the deductions you’re entitled to and reduce your overall tax burden.

Quarterly estimated tax payments

Because self-employed individuals don’t have taxes automatically withheld, the IRS requires quarterly estimated tax payments to cover both income tax and self-employment tax.

When to make estimated tax payments

Quarterly payments are due four times a year: April 15, June 15, September 15, and January 15 of the following year. If you don’t pay enough throughout the year, you could face penalties, even if you catch up when filing your annual tax return.

How to calculate quarterly payments

To calculate your quarterly payments, estimate your total income, deductions, and taxes for the year, then divide this amount into four equal parts. The IRS provides Form 1040-ES, which includes worksheets to help you calculate these amounts. Many self-employed individuals find it helpful to work with a tax professional or use accounting software to ensure accuracy.

Managing self-employment tax effectively

Managing self-employment tax requires discipline and planning, but it doesn’t have to be stressful. One of the best strategies is to set up a dedicated tax savings account. Each month, deposit a portion of your income into this account—ideally 25-30%—to cover your estimated tax payments.

By regularly setting money aside, you’ll be prepared when quarterly payments are due, avoiding the financial strain of scrambling to find the funds. Additionally, keeping your tax savings separate from your everyday business accounts helps you stay organized and reduces the temptation to spend the money on other expenses.

Using tools like Quicken Business & Personal and working with a tax advisor can also streamline your tax management. These resources can help you track income, calculate payments, and ensure compliance with IRS requirements, giving you peace of mind and more time to focus on growing your business.