Self-Employment Tax

How Self-Employment Tax Is Calculated

Self-employment tax is the self-employed version of the Social Security and Medicare taxes a traditional paycheck already withholds automatically. A traditional employer splits these payroll taxes with the employee; someone self-employed effectively pays both halves themselves. Enter your net self-employment earnings and this calculator finds your total Social Security and Medicare tax liability.

This is separate from federal income tax — see the Income Tax Calculator for that. Both apply to self-employment income, on top of each other, not instead of one another.

The Formula

$$\text{Net Earnings for SE} = \text{Net Self-Employment Earnings} \times 92.35\%$$ $$\text{Social Security Portion} = \min(\text{Net Earnings for SE}, \text{Wage Base}) \times 12.4\%$$ $$\text{Medicare Portion} = \text{Net Earnings for SE} \times 2.9\%$$

The 92.35% factor roughly mirrors how a traditional employee’s payroll tax is calculated on wages that already exclude the employer’s own matching share. The Social Security portion is capped at an annual wage base (adjusted yearly by the IRS); the Medicare portion has no cap.

Worked Example

$80,000 in net self-employment earnings, with a $184,500 Social Security wage base:

1. Net earnings for SE: $80,000 \times 92.35\% = 73,880$.
2. Social Security portion: $73,880 \times 12.4\% = 9,161.12$ (below the wage base, so the full amount is taxed).
3. Medicare portion: $73,880 \times 2.9\% = 2,142.52$.
4. Total self-employment tax: $9,161.12 + 2,142.52 = 11,303.64$.
5. Half of this, about $5,651.82, is deductible from income tax as an above-the-line adjustment.

Key Factors to Consider

• Self-employment tax and quarterly estimated tax payments are closely connected obligations for most self-employed people. Since self-employment income has no employer automatically withholding tax throughout the year, most self-employed individuals need to make quarterly estimated payments covering both self-employment tax and income tax — see the Quarterly Estimated Tax Calculator for how those payments are figured and scheduled.
• The Additional Medicare Tax applies to high earners on top of the standard 2.9% Medicare portion. An extra 0.9% Medicare surtax applies to self-employment (and wage) income above certain thresholds that vary by filing status — this calculator’s Medicare figure covers the standard rate, so a high earner’s actual Medicare liability may be somewhat higher than shown here.
• Business expenses reduce net self-employment earnings before this tax is even calculated. Self-employment tax is based on NET earnings (after deducting legitimate business expenses), not gross revenue — keeping thorough records of deductible business expenses directly lowers both self-employment tax and income tax.
• Both halves of self-employment tax mirror what a traditional employer and employee would each pay separately. Understanding that a self-employed person is effectively paying both the “employee” and “employer” share of Social Security and Medicare tax helps explain why the total rate (15.3% combined, before the 92.35% adjustment) looks higher than what shows up on a typical employee’s own pay stub.

Common Mistakes

• Forgetting this exists on top of income tax. Self-employment tax and income tax are two separate obligations — someone new to self-employment can easily underestimate their total tax bill by only planning for one of them.
• Assuming the Social Security cap applies to Medicare too. Only the Social Security portion has an annual wage-base ceiling — the Medicare portion applies to every dollar of net earnings, with no cap (and an additional surtax above certain high-income thresholds, not modeled here).
• Missing the half-deduction. Half of the self-employment tax is deductible from income tax — skipping this deduction means overstating taxable income and paying more income tax than necessary.

Useful to Know

• Need to figure out what to actually send the IRS each quarter? Quarterly Estimated Tax Calculator combines this calculator’s self-employment tax with your income tax liability into a real quarterly payment schedule.
• Setting your rates as a freelancer or contractor? Freelance Hourly Rate Calculator helps you price your work so self-employment tax and other overhead are already covered.
• Tracking mileage as a deductible business expense? Mileage Deduction Calculator turns your business miles into a deduction that lowers the net earnings this calculator taxes.