Self-employment tax: What it is and how it works

As tax season approaches, you might be starting to gather up the materials you’ll need to file your taxes. If you’re self-employed—a freelancer, an independent contractor or a sole proprietor, for example—the process for filing taxes can look a little different from what it does for those who are more traditionally employed. That’s because a self-employed worker is considered both an employee and an employer.

Key takeaways

• Self-employment tax is the tax you file as a self-employed worker to help fund Social Security and Medicare.
• Generally, 92.35% of your net earnings from self-employment are taxed at the 2023 rate of 15.3%. Of that, 12.4% goes toward Social Security taxes, and 2.9% goes toward Medicare taxes.
• To file your self-employment taxes, you can fill out Schedule C and Schedule SE tax forms along with Form 1040.

You have to file self-employment tax if you’re a self-employed individual or a small-business owner. Self-employment taxes are used to fund the two government welfare programs: Social Security and Medicare.

Self-employment tax is separate from and additional to income taxes. Self-employment tax is also separate from Federal Income Contributions Act tax. FICA is a U.S. federal payroll tax that helps fund Social Security and Medicare. 

According to the IRS, “You usually must pay self-employment tax if you had net earnings from self-employment of $400 or more. Generally, the amount subject to self-employment tax is 92.35% of your net earnings from self-employment. You calculate net earnings by subtracting ordinary and necessary trade or business expenses from the gross income you derived from your trade or business.”

Once you determine what 92.35% of your net earnings amounts to, you can use the current self-employment tax rate to determine how much you may owe in total.

The current self-employment tax rate is 15.3%. This percentage is split into the tax money that goes toward Social Security and the tax money that goes toward Medicare.

A self-employed worker is taxed as both an employee and an employer. For Social Security taxes, employees and employers are taxed at a rate of 6.2%, meaning self-employed workers are taxed at double that (12.4%). In 2023, the Social Security tax applies to the first $160,200 of net self-employment income.

For Medicare taxes, employees and employers are taxed at a rate of 1.45%, meaning self-employed workers are taxed at 2.9%. This tax applies to your entire net earnings. 

Say your net earnings in a given year are $100,000. To calculate how much you’re likely to pay in self-employment taxes this year, you can first determine what the taxable 92.35% of your earnings amounts to. In this case, it’s $92,350.

Then, you can multiply the $92,350 in taxable earnings by the 15.3% self-employment tax rate to determine how much of your money will be due in self-employment taxes. This amounts to $14,129.55.

To get a clearer sense of how much of your money is going toward Social Security taxes versus Medicare taxes, you could multiply your taxable earnings by the smaller tax rates that apply to each separate program. For example, you can multiply the $92,350 in taxable earnings by 12.4% to determine that $11,451.40 will be taken in Social Security taxes. And you can multiply the $92,350 in taxable earnings by 2.9% to determine that $2,678.15 will be taken in Medicare taxes.

If you’re self-employed, you’ll likely need to fill out both a Schedule C and a Schedule SE tax form. 

Schedule C (Form 1040), Profit or Loss from Business is a tax form that’s used to report net income and business expenses. 

Schedule SE (Form 1040) is a tax form that helps you calculate self-employment taxes. 

It’s also important to note that if you’re self-employed, you may have to file estimated taxes quarterly in order to avoid penalties from the IRS. Self-employed workers aren’t subject to tax withholding, so making quarterly estimated tax payments helps ensure that all self-employment and income tax obligations are still being met.

If you’re newer to self-employment, handling self-employment tax may seem very different from having tax withholdings automatically taken out of your paycheck. Thankfully, it’s a fairly straightforward process. And if you have concerns about filing correctly, you can always consult a tax professional.

Need more guidance this tax season? Learn how to file taxes and maximize your returns.