When you work for yourself, you owe self-employment tax on top of regular income tax. It covers Social Security and Medicare — the same programs an employee funds through payroll — but you pay both the employee and employer shares. Understanding it prevents the classic freelancer shock of a much larger tax bill than expected.
Why the self-employed pay more
Employees split Social Security and Medicare taxes with their employer, each paying 7.65% for a combined 15.3%. When you are self-employed, you are both the worker and the employer, so you owe the full 15.3% yourself. This is the self-employment tax, and it applies on top of ordinary income tax. It is the single biggest surprise for people leaving a W-2 job for freelancing.
How the 15.3% breaks down
The 15.3% is made of 12.4% for Social Security and 2.9% for Medicare. The Social Security portion applies only up to an annual wage base (about $176,100 in 2025), while the Medicare portion has no cap. High earners pay an extra 0.9% Medicare surtax above certain thresholds. So very high self-employment income is taxed at 2.9% plus the surtax rather than the full 15.3% once you pass the Social Security cap.
The net-earnings adjustment and deduction
You do not pay self-employment tax on your full profit. First you multiply net earnings by 92.35%, which approximates the employer-share exclusion, and apply the 15.3% to that smaller figure. Then you deduct half of the resulting tax from your income for income-tax purposes, mirroring how an employer's share is not taxable to you. These two adjustments meaningfully reduce the real burden.
Paying it through the year
Self-employment tax is reported on Schedule SE and added to your income tax on your return. Because no employer withholds for you, you generally must make quarterly estimated payments to cover both taxes. Setting aside roughly 25% to 30% of net profit is a common rule of thumb for freelancers. Ignoring the quarterly schedule can lead to penalties and a painful April.
A freelancer nets $50,000. Multiplying by 92.35% gives about $46,175, and 15.3% of that is roughly $7,065 of self-employment tax. She then deducts about $3,533 (half) from her income before figuring income tax, softening the total bill.
Key takeaways
- Self-employment tax is 15.3% covering both the employee and employer shares of Social Security and Medicare.
- It breaks into 12.4% Social Security (capped) and 2.9% Medicare (uncapped).
- You apply the tax to 92.35% of net earnings, not your full profit.
- Half of the self-employment tax is deductible against your income tax.
- No one withholds for you, so quarterly estimated payments are usually required.
Common mistakes
- Forgetting self-employment tax and budgeting only for income tax.
- Applying 15.3% to full profit instead of 92.35% of net earnings.
- Skipping quarterly payments and getting hit with an underpayment penalty.
FAQ
Do I owe self-employment tax on a small side gig?
Yes, once your net self-employment earnings reach $400 in a year you generally owe self-employment tax, even on a small side hustle.
Does an S-corp change this?
Electing S-corporation status can reduce self-employment tax by splitting income into salary and distributions, but it adds payroll and compliance costs, so it only makes sense above a certain income.