What Is Self-Employment Tax?
Self-employment tax is a federal tax that covers contributions to Social Security and Medicare for individuals who work for themselves. It is separate from federal income tax and is calculated on net self-employment earnings — the income left after deducting business expenses from gross self-employment revenue.
The term "self-employment tax" often catches freelancers, contractors, and sole proprietors off guard because it represents an additional tax obligation beyond regular income tax. Understanding why this tax exists requires understanding how Social Security and Medicare contributions work for employees versus self-employed individuals.
Social Security and Medicare: The FICA Background
Employees pay into Social Security and Medicare through FICA (Federal Insurance Contributions Act) withholding. On every paycheck, a portion goes toward Social Security and another portion toward Medicare. What many employees do not realize is that their employer also pays a matching amount — equal to the employee's contribution — directly to the government.
From the employee's perspective, only the employee share appears on the pay stub. The employer portion is a cost the employer bears separately, and it is not visible in the employee's paycheck withholding.
The combined rate for both the employee and employer portions of Social Security and Medicare has historically totaled approximately 15.3% of covered wages, with each side contributing roughly half (approximately 7.65% each). These rates and their component breakdowns are subject to IRS adjustment and legislative change.
Why Self-Employed Workers Pay Both Portions
When someone is self-employed, there is no separate employer entity to pay the employer's matching share. The self-employed worker is both the employee and the employer simultaneously. As a result, the self-employed individual is generally responsible for the full combined rate on their net self-employment earnings.
This is why a contractor or freelancer earning the same gross dollar amount as a salaried employee ends up with a higher effective tax burden from payroll taxes alone. The salaried employee's employer absorbs half of the contribution cost; the self-employed person must absorb the entire amount from their own earnings.
Self-Employment Tax Rate and Wage Base
The self-employment tax rate has generally been approximately 15.3% of net self-employment income. This breaks down into two components:
| Component | Approximate Rate | Income Cap |
|---|---|---|
| Social Security | ~12.4% | Applies up to the annual wage base limit (adjusted annually) |
| Medicare | ~2.9% | No upper limit; applies to all net SE earnings |
| Additional Medicare | 0.9% | Applies above a higher income threshold for certain filers |
The Social Security portion applies only up to an annual wage base ceiling, which the IRS adjusts each year for wage growth. Income above that ceiling is not subject to the Social Security portion of self-employment tax, though the Medicare portion continues to apply with no cap. Rates and thresholds can change through IRS adjustments or legislative action — verify current figures with IRS Publication 505 or Schedule SE instructions.
Calculating Net Self-Employment Earnings
Self-employment tax is not calculated on gross revenue. It is calculated on net earnings from self-employment — the profit remaining after deducting ordinary and necessary business expenses. This is important because high gross revenue does not necessarily equal high self-employment tax liability if significant business expenses reduce the net figure.
Additionally, there is a further adjustment: for purposes of calculating self-employment tax, net earnings are typically multiplied by a factor slightly below 100% to account for the deductibility mechanics of the calculation. The specifics of this adjustment are outlined in the IRS Schedule SE instructions.
The Deductibility of Part of Self-Employment Tax
To partially offset the burden of paying both portions, the IRS generally allows self-employed individuals to deduct a portion of self-employment tax when calculating adjusted gross income (AGI). This deduction is often described as an above-the-line deduction, meaning it reduces AGI regardless of whether the taxpayer itemizes.
The rationale is that employees do not pay income tax on the employer's FICA contribution on their behalf — that cost comes out of the employer's funds before any income calculation. Allowing self-employed workers to deduct a portion of their SE tax creates a rough equivalent treatment. The specific deductible fraction is approximately half of the total SE tax computed on Schedule SE, but the exact mechanics should be verified with current IRS instructions.
Important context for 1099 vs. W-2 comparisons. When comparing a contractor rate to a salaried offer, the additional SE tax burden is a significant factor. A contractor earning the same gross revenue as a salaried employee will owe meaningfully more in payroll taxes. 1099 vs W-2 calculators account for this difference when producing comparison estimates.
Suppose a freelance consultant has $90,000 in gross consulting revenue and $10,000 in allowable business expenses, resulting in $80,000 in net self-employment earnings.
At a 15.3% SE tax rate (applied to approximately 92.35% of net earnings per the standard Schedule SE adjustment), the estimated self-employment tax would be roughly $11,304.
A salaried employee earning $80,000 in wages would pay the employee FICA share (roughly 7.65% × $80,000 = $6,120) — and their employer would separately pay a matching $6,120 that does not appear on the employee's pay stub at all.
The contractor pays approximately $11,304 while the employee sees $6,120 withheld. The effective tax burden on the same earnings is significantly different. This is the core of the 1099 vs. W-2 tax comparison.
These figures are illustrative only and use approximate rates. They do not reflect the exact SE tax for any specific situation or year. Do not use these for actual tax calculations.
Estimated Tax Payments for Self-Employed Workers
Because employers do not withhold self-employment tax from contractor payments, self-employed individuals generally must pay estimated taxes directly to the IRS on a quarterly schedule. Both the income tax liability and the self-employment tax liability on net earnings are typically covered through these quarterly estimated payments.
Underpayment of estimated taxes can result in a penalty assessed by the IRS. The article on estimated quarterly tax rules on this site explains the general payment schedule and underpayment concept.