What Is Self-Employment Tax?

Freelancers,  independent contractors  , and other self-employed professionals are responsible for paying several taxes on their income—one of which  is the self-employment tax  (SE tax). The SE tax, used to fund Social Security and Medicare, is equal to the total amount owed for those two programs.

This tax is higher than the Social Security and Medicare taxes you pay when working for someone else because employers have to share these taxes with their employees. When self-employed, you are responsible for paying the entire amount yourself.

How much is the self-employment tax?

The SE tax   applies to  92.35% of your net income. Net income is calculated by subtracting your business expenses from your gross income  . The amount you pay in SE taxes can vary from year to year depending on this figure. Here are some other factors to consider:

• Did you earn enough?  Net income under $400 is generally not subject to SE tax.
• Did you work for someone else?  If you earned money by working for part of the year as an employee and your employer   withheld Social Security and Medicare payroll taxes , you don't have to pay again on that income.
• Are you a church employee?  The IRS  handles the income of religious employees  a little differently than other self-employed individuals. Unless exempt, church employees who earn more than $108.28 must pay SE tax.
• Do you work as a family caregiver?  Special rules apply for family caregivers  who are not employees of a company. 

If your business's expenses exceed its income, the result will be a net loss. You can deduct net losses from your gross income, but only up to a certain limit. For more information,   see Publication 334, Tax Guide for Small Business .

Self-Employment Tax Rate

The SE tax rate  is 15.3%  – a combined total of the 12.4% Social Security tax and the 2.9% Medicare tax. This contribution funds programs that provide benefits to retirees, people with disabilities, and children. These taxes are applied in different ways:

• Social Security tax:  For 2023, Social Security tax for self-employed individuals is only due on the first $160,200 of their earnings.
• Medicare tax:  This tax applies to your income, no matter how much you make. Plus, if your income is more than $200,000 (single, head of household), $250,000 (married filing jointly) or $125,000 (married filing separately), you'll have to pay an additional 0.9% Medicare tax.

Federal Taxes

Along with the SE tax, you may also be responsible for paying federal income taxes. As a self-employed individual, if your net income equals at least $400, you must file an income tax return. And even if that's not the case, you   may still have to file an income tax return according to the additional filing requirements listed on Form 1040 .

state and local taxes

State and local taxes are also separate from the SE tax. You'll probably have to pay state income taxes as well as  sales and use taxes  . These may apply to your situation in different ways:

• Sales Tax:  You may be required to collect and remit sales tax on the retail goods and services you provide to your customers.
• Use tax:  This applies to items purchased tax-free for your business that would otherwise be taxed in your state.

For example, let's say you work in New York but buy an office laptop online from a seller in another state. Even if the seller doesn't charge NY state and local taxes, you'll have to pay them later. These tax rates and rules vary by location -  visit your state's government website for more information  .

Self-Employment Tax Deduction

There are several tax breaks available to entrepreneurs. For example, you can deduct the employer portion of the SE tax from your adjusted gross income. Another example  is the qualified business income (QBI)  deduction. It allows you to deduct up to 20% of your QBI, as well as up to 20% of real estate investment trust (REIT) dividends and publicly traded partnership (PTP) income.

Other common  deductions  include:

• Retirement Savings Plan
• Health insurance premiums
• Home office equipment
• Business loan interest
• rental space
• Internet and telephone costs
• Work-related education expenses (e.g., tuition, books, supplies, lab fees)
• travel and food expenses
• Vehicle and Mileage Expenses

If you're unsure about whether your self-employment expenses can be forgiven, contact a tax professional.

Self-Employment Tax Forms

To report and file Social Security and Medicare taxes, you  will need Schedule SE (Form 1040), Self-Employment Tax. However, you  can use the estimated tax method to pay income and SE tax using Form 1040-ES, Estimated Tax for Individuals.  Depending on the business structure (sole proprietorship, LLC, partnership, etc.), you will likely   need  additional forms .

When are self-employment taxes due?

In most circumstances, you must file an annual tax return and make quarterly  estimated tax payments  . If you wait to pay taxes until the following April, when your annual tax return is due, the IRS may impose a penalty. Each quarterly payment period   coincides with the IRS due date :

If the due date falls on a weekend or federal holiday, you have until the next business day to file the application without penalty.

How to File Self-Employment Taxes

Filing and submitting SE taxes can be complicated, so most entrepreneurs use tax software or hire a professional to help make it easier. Here's a general overview of the process:

• Step 1:  Calculate your total income earned from self-employment.
• Step 2:  Collect details showing your business expenses and calculate the total amount.
• Step 3:  Identify which expenses are eligible for tax deduction.
• Step 4:  Fill out the applicable tax forms and submit your payment.

 You can make quarterly payments online using  the Electronic Federal Tax Payment System (EFTPS®) or  submit vouchers on  IRS Form 1040-ES .