Simple definition
Self-employment tax is the Social Security and Medicare tax that people who work for themselves pay. When you have an employer, the two of you split this tax. On your own, you cover both halves — a total of 15.3% of your net self-employment earnings. Think of it as being your own boss and your own payroll department at once.
Why it matters
This tax often surprises new freelancers because nothing is withheld for it automatically. Budgeting for the full 15.3% keeps you from a shock at tax time. The upside: these payments build your Social Security and Medicare record for later.
Real-life example
Suppose you clear $50,000 in net profit from freelancing. Self-employment tax runs 15.3%, or about $7,650, on top of any income tax you owe. You can deduct half of that self-employment tax when figuring your income tax, which softens the hit a little. These are rounded, hypothetical figures.
Formula
Self-employment tax = 15.3% of net self-employment earnings (12.4% Social Security + 2.9% Medicare)
Common mistakes
- Forgetting to set money aside, since no employer withholds the tax for you.
- Assuming income tax is your only obligation and ignoring self-employment tax entirely.
- Overlooking the deduction for half of the self-employment tax you pay.
- Waiting until filing to pay, then owing a large bill plus possible penalties.
Pro tips
- Set aside a portion of every payment you receive so the tax is covered.
- Consider quarterly estimated payments to spread the cost through the year.
- Track business expenses carefully, since they lower the net profit you owe tax on.
- Ask a tax professional how the rules apply to your situation, as they change and vary.
Related Money Dictionary terms
- FICAThe payroll tax that funds Social Security and Medicare, split between you and your employer on your wages.
- Payroll TaxTaxes taken out of wages to fund programs like Social Security and Medicare, paid by both worker and employer.
- 1099A family of forms reporting income you earned outside a regular job, such as freelance work or investment payouts.
- Estimated TaxesPayments made throughout the year on income that has no tax withheld, such as freelance or investment earnings.
- Taxable IncomeThe portion of your income left after deductions that the government actually applies tax rates to.
Frequently asked questions
Do I really pay both halves?
Yes. When you work for an employer, you and the employer each pay half of the Social Security and Medicare tax. On your own, there is no employer to split it with, so you cover both shares — a total of 15.3% of your net earnings. You can deduct half when figuring income tax.
When do I pay self-employment tax?
You usually pay it along with your income tax when you file your return. Because nothing is withheld from a self-employed paycheck, many people make quarterly estimated payments through the year to cover it. Setting money aside as you earn helps avoid a large bill and possible penalties at filing time.
Is any of it deductible?
Yes. You can deduct half of your self-employment tax when calculating your income tax. This does not lower the self-employment tax itself, but it reduces the income your income tax is figured on. A tax professional can help you apply it correctly, since rules change and vary by situation.
Knowing what Self-Employment Tax means is knowledge — the first half. A brick gets placed when you act on it: set aside a share of each freelance payment so self-employment tax is covered.
Also builds: Self-Employment & Side Income
Sources & references
More in Taxes
Plain-English education — not personalized legal, tax, or investment advice.