Self-Employment Tax

When you are employed by a company, Social Security and Medicare taxes (known as FICA taxes) are split between you and your employer, each paying 7.65%. When you are self-employed, you are responsible for both halves, resulting in a combined self-employment tax rate of 15.3%. This consists of 12.4% for Social Security (on net earnings up to the Social Security wage base of $176,100 for 2025) and 2.9% for Medicare (on all net earnings with no cap).

Self-employment tax is calculated on 92.35% of your net self-employment income (this adjustment accounts for the employer-equivalent portion). You may deduct half of the self-employment tax as an adjustment to income on your personal tax return, which reduces your adjusted gross income but does not reduce the self-employment tax itself.

For higher earners, an additional 0.9% Medicare surtax applies to self-employment income above $200,000 (single) or $250,000 (married filing jointly). Combined with the standard 2.9% Medicare tax, this brings the Medicare portion to 3.8% on income above those thresholds.

Self-employment tax can be a significant expense, often exceeding the income tax owed on the same earnings. For example, a sole proprietor earning $100,000 in net self-employment income would owe approximately $14,130 in self-employment tax before any income tax. This is one of the primary reasons business owners explore strategies like electing S-Corp tax treatment, which may allow a portion of business income to avoid payroll taxes.

Self-employment tax is paid through the estimated tax payment system, with quarterly payments due on the same schedule as estimated income taxes. Failing to make adequate quarterly payments may result in underpayment penalties. It is worth working with a tax professional to project your self-employment tax liability and plan your quarterly payments accordingly.