Self-employment tax: Definition, rates, and how to calculate

The world of self-employment is very different from that of a traditional W-2 worker in many ways: managing business expenses, operating a business, and even taxation. Self-employed people have additional tax obligations called self-employment tax.

There are a few considerations to be mindful of, and we’ll walk you through them here!

Do you have questions about your self-employment taxes? Check out our Guide to Gig Worker Taxes.

What is self-employment tax?

It may seem that self-employment tax encompasses all the taxes you might pay when you’re self-employed. In reality, it specifically covers Social Security and Medicare taxes. In other words, if you’re self-employed, you pay into Social Security and Medicare programs through self-employment tax (SE tax).

If you’ve ever worked as a W-2 employee, you may recall these taxes are covered as part of your payroll tax. For W-2 wage earners, the payroll tax rate is 7.65%.

How much is self-employment tax? What’s the self-employment tax rate for 2024?

Self-employment tax isn’t a fixed figure — it depends on your net earnings, which is your profit or loss after business deductions. For the 2023 tax year, the self-employment tax rate is 15.3%. The rate is made up of:

· 12.4% Social Security tax

· 2.9% Medicare tax

For 2023 taxes, the first $160,200 of self-employment net earnings is subject to Social Security. For 2024 taxes, that amount is the first $168,800.

All self-employment net earnings of more than $400 is subject to self-employment tax. A 0.9% additional Medicare tax may also apply if your net earnings exceed the threshold of $200,000 for Single filers and $250,000 if you’re filing jointly.

How to calculate self-employment tax

Here’s how to calculate self-employment tax.

1. Determine your net earnings from self-employment: This includes income from freelance work, gig economy jobs, or your business. Make sure to subtract any qualifying business expenses. If you file a Schedule C you can use the net profit calculated on that form.

2. Multiply your net earnings by 92.35%. If your net earnings are more than zero then multiply your net earnings by .9235. This accounts for the fact that you only pay self-employment tax on 92.35% of your net earnings. (You use this percentage since employees pay half of Social Security and Medicare taxes or 7.65% of their total wage income.)

3. Calculate the Social Security portion. Multiply the smaller of step two or $160,200 by the current Social Security tax rate, 12.4%.

4. Calculate the Medicare portion: Multiply the result from step two by the current Medicare tax rate, 2.9%. Unlike Social Security, there is no income limit for Medicare taxes.

5. Add the Social Security and Medicare portions to get your self-employment tax amount.

An example of calculating self employment taxes

1. Sal makes $50,000 in net earnings from his rideshare job. He wants to calculate self-employment taxes for the tax year.

2. He multiplies his net earnings ($50,000) by 92.35% and arrives at $46,175.

3. He determines the Social Security portion by taking the total self-employment taxes due, $46,175, by the Social Security tax rate, 12.4%, to arrive at $5,725.7.

4. He then calculates the Medicare portion by multiplying $46,175 by 2.9% to arrive at $1339.08

5. He arrives at finding the self-employment taxes due by adding the Social Security portion ($5,725.7) and Medicare portion ($1,339.08), totaling $7,064.78.

Net earnings: $50,000

Self-employment tax on 92.35% of your net earnings: $50,000 x 92.35% = $46,175

Social Security portion: $46,175 x 12.4% = $5,725.7

Medicare portion: $46,175 x 2.9% = $1,339.08

Total self-employment tax: $5,725.7 + $1,339.08 = $7,064.78

Self-employed tax deductions

Here’s the good news about self-employment taxes … you get to take a self-employment tax deduction! You can deduct the employer portion of your self-employment tax as an adjustment to income on Form 1040. The amount you can take as a tax deduction is usually half of the employer’s portion. This decreases your taxable income and, as a result, your federal income tax. Here are some other self-employed tax deductions you can take.

Who must file self-employment taxes?

If your net earnings from self-employment equal $400 or more, you need to:

· File Schedule SE

· Pay any self-employment tax due

This is true regardless of your age, and even if you receive Social Security or Medicare benefits.

You’re considered self-employed if you own a business or are an independent contractor and receive a 1099 form. Because tax is usually not withheld from self-employment income (nonemployee compensation), you could be required to make estimated tax payments during the year to cover your federal income tax and SE tax.

What happens if you don’t pay self-employment tax?

If you don’t pay self-employment tax, you could run into issues. In fact, taxpayers sometimes don’t understand this rule and end up with an IRS CP2000 Notice from the IRS.

Related read: Learn how to address an IRS CP2000 notice.

Self-employment tax forms

Self-employed tax forms and returns vary depending on your business designation (business entity). Here’s a rundown:

· If you are a single-member LLC or sole proprietor: IYou will report your business revenue and expenses on IRS Schedule C (Form 1040) in most cases. Use Schedule SE to figure out how much self-employment tax you owe if you earn more than $400 in business profits per year.

· Non-LLCs or sole proprietorships: Use the business return to file a Schedule E with your individual return. Then, use the number from Schedule E to fill out Schedule SE.

For example, a partnership files Form 1065 and provides a Schedule K-1 to its partners. The partners use the information from the Schedule K-1 to complete their individual return and Schedule SE.

Note: If you have an S corporation you do not have to pay SE tax on your share of the business’ income.

Get more help with SE income and taxes

By understanding the steps involved in SE tax, you can successfully stay on top of your self-employment tax obligations. Remember, there’s always help nearby. Don’t hesitate to lean on our online tax software or a tax professionals. In fact, there are a few ways our H&R Block can help:

· Have a side business? Take control of your taxes and get every credit and deduction you deserve with our online tax software. File with H&R Block Online Deluxe (if you don’t have business expenses) or H&R Block Online Premium (if you have business expenses).

· Have questions about self-employment taxes and other small business tax issues? Rely on our team of small business-certified tax pros at Block Advisors to get your taxes right and keep your business on track. Find out how Block Advisors can help with your small business taxes.

· Curious if you’ll get a refund? Whether you’re a W-2 vs. 1099 worker, you can use our tax calculator to help determine your tax outcome.