Self-Employment Tax

Employees split Social Security and Medicare taxes with their employer. When you work for yourself, you generally pay both portions through self-employment tax.

If you elect S corporation status and pay yourself as an employee, SurePayroll® By Paychex calculates, files, and deposits payroll taxes on your schedule.

Social Security and Medicare under self-employment tax

Self-employment tax, set by the Self-Employment Contributions Act (SECA), is how people who work for themselves contribute to Social Security and Medicare. The Social Security portion of self-employment tax covers old-age, survivors, and disability insurance. The Medicare portion covers hospital insurance. The IRS explains the tax on its Self-Employment Tax (Social Security and Medicare Taxes) page.

Who pays self-employment tax

You generally owe self-employment tax when your net earnings from self-employment are $400 or more. The IRS Self-Employed Individuals Tax Center says you're generally self-employed if any of these apply:

• You carry on a trade or business as a sole proprietor or an independent contractor.
• You're a member of a partnership that carries on a trade or business.
• You're otherwise in business for yourself, including in a part-time business or as a gig worker.

Receiving a Form 1099 for services you performed doesn't determine whether you owe self-employment tax. You generally must report taxable business income even if a client doesn't send you a Form 1099.

Use our free self-employment tax calculator to estimate your self-employment tax liability.

Self-employment tax rate and the Social Security wage base

The self-employment tax rate is 15.3%, made up of two parts with different limits.

The Social Security Administration sets the Social Security wage base each year.

A separate 0.9% Additional Medicare Tax may apply when your Medicare wages and self-employment income, combined (together with your spouse's, if you file jointly), exceed the threshold for your filing status: $200,000 if you file single, head of household or as a qualifying surviving spouse, $250,000 if you're married filing jointly, and $125,000 if you're married filing separately. You calculate and report Additional Medicare Tax on Form 8959, Additional Medicare Tax, rather than on Schedule SE. The IRS covers the details in its Additional Medicare Tax questions and answers.

How to calculate self-employment tax on net earnings

You calculate self-employment tax in three steps:

1. Determine your net earnings from self-employment. Subtract your ordinary and necessary business expenses from your gross business income, as IRS Topic 554 describes. The starting point is net earnings, not gross revenue.
2. Multiply your net earnings by 92.35%. Schedule SE generally multiplies net earnings by 92.35% before applying the Social Security and Medicare rates.
3. Apply both rates to that amount. Multiply by 12.4% for Social Security, up to the wage base, and by 2.9% for Medicare.

Here's how the math works on $60,000 in net earnings, assuming no wages from a W-2 job and earnings below the Additional Medicare Tax threshold:

To estimate your own numbers, use the self-employment tax calculator.

Self-employment tax vs. income tax

You may owe both self-employment tax and federal income tax on income from your business, but you calculate the two taxes separately. Self-employment tax funds Social Security and Medicare. Federal income tax depends on your taxable income and the tax rates that apply to it. You report both taxes on Form 1040.

You may deduct the employer-equivalent portion of your self-employment tax when you figure your adjusted gross income, on Schedule 1 (Form 1040), Additional Income and Adjustments to Income. That deduction can lower your federal income tax, but it doesn't lower the self-employment tax itself.

Self-employment tax vs. FICA tax

Self-employment tax and FICA both fund Social Security and Medicare, but they apply to different types of earnings.

If you work as an employee, your employer withholds 7.65% in FICA taxes from your wages and pays a matching 7.65%. If you work for yourself, you generally calculate self-employment tax on your net earnings from self-employment. The regular 15.3% self-employment tax rate reflects both the employee and employer portions.

How W-2 wages affect self-employment tax

If you have wages from a W-2 job and net earnings from self-employment in the same year, FICA applies to your wages and self-employment tax applies to your net earnings. Your wages from that job may also reduce how much of your net earnings is subject to the Social Security portion of self-employment tax.

The annual Social Security wage base applies to your combined wages and tips subject to Social Security tax and your net earnings from self-employment. If your wages and tips subject to Social Security tax use part of the wage base, only the remaining amount of the wage base can apply to your net earnings for the 12.4% Social Security portion. If your wages and tips subject to Social Security tax reach the wage base, your net earnings generally aren't subject to the 12.4% portion. The 2.9% Medicare portion still applies because there's no wage base limit for Medicare tax.

You figure the Social Security portion on Schedule SE, and the IRS Self-Employment Tax page explains how wages and net earnings combine toward the wage base.

How to report and pay self-employment tax

You calculate and report self-employment tax with your annual federal income tax return. A sole proprietor typically reports business profit or loss on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship), then calculates self-employment tax on Schedule SE (Form 1040), Self-Employment Tax. The self-employment tax from Schedule SE goes on Schedule 2 (Form 1040), which carries to Form 1040.

You may also need to pay tax during the year through estimated payments. Estimated payments can include both federal income tax and self-employment tax, so the amount depends on your total expected tax, withholding, and refundable credits. Use Form 1040-ES, Estimated Tax for Individuals, to determine whether you need to make estimated payments. The IRS Estimated Taxes page explains who has to pay.

How business expenses affect self-employment tax

Deductible business expenses reduce your business profit. Because self-employment tax generally applies to net earnings rather than revenue, those expenses may also reduce the amount subject to self-employment tax. For which expenses count, see tax deductions for the self-employed.

Payroll when you pay yourself as an employee

SurePayroll is built for S-corp owner-employees processing payroll for themselves or their team.

Explore one-employee payroll

Related terms

• FICA: the Social Security and Medicare taxes withheld from employee wages and matched by the employer.
• Independent contractor: a worker in business for themselves rather than an employee.
• Form 1099-NEC: the form businesses use to report nonemployee compensation.