How Self-Employment Tax Works

If you’re self-employed, no employer withholds Social Security and Medicare from your paycheck, so the IRS collects both halves directly from you through self-employment tax. It sounds intimidating on a 1040 line, but the math behind it is only a few steps: a small adjustment to your profit, a combined tax rate, and one income cap. Here’s how it works.

Two taxes rolled into one

Self-employment (SE) tax isn’t really a separate tax so much as the self-employed version of the Social Security and Medicare taxes that come out of every W-2 employee’s paycheck (FICA). A W-2 employee pays 7.65% (6.2% Social Security plus 1.45% Medicare), and their employer matches it with another 7.65% on the employee’s behalf. Since you’re both the employee and the employer when you’re self-employed, you owe the full combined rate yourself: 12.4% Social Security plus 2.9% Medicare, for 15.3% total on the portion of income that’s subject to it.

That “portion” matters, because SE tax isn’t calculated on your full net profit. The IRS only taxes 92.35% of it, an adjustment meant to roughly mirror the fact that a traditional employer’s half of payroll tax never counts as the employee’s taxable income in the first place. Self-employed people don’t have a separate employer contribution to exclude, so the tax code approximates the same effect with this flat percentage instead.

The other moving part is the Social Security wage base, an annual income cap above which the 12.4% Social Security portion stops applying. For 2024 that cap is $168,600. The 2.9% Medicare portion has no cap at all and keeps applying to every dollar of net earnings, no matter how high your income goes (it can even increase slightly at very high incomes through the Additional Medicare Tax, which isn’t part of this calculation).

The formula

Put together, the calculation runs in three steps:

Net Earnings = Net Profit x 92.35%
Social Security Tax = min(Net Earnings, Social Security Wage Base) x 12.4%
Medicare Tax = Net Earnings x 2.9%
Self-Employment Tax = Social Security Tax + Medicare Tax

The wage base for 2024 is $168,600. Below that threshold, the whole calculation collapses to a flat 15.3% of your net earnings. Above it, only the Medicare piece keeps growing.

Worked examples

Say your net self-employment profit for the year is $80,000, comfortably under the wage base.

• Net earnings: $80,000 x 92.35% = $73,880.00
• Social Security tax: $73,880.00 x 12.4% = $9,161.12
• Medicare tax: $73,880.00 x 2.9% = $2,142.52
• Self-employment tax: $9,161.12 + $2,142.52 = $11,303.64

Half of that, $5,651.82, is deductible when you calculate your income tax (more on that below).

Now say your net profit is $200,000 instead, well above the $168,600 wage base.

• Net earnings: $200,000 x 92.35% = $184,700.00
• Social Security tax (capped): $168,600 x 12.4% = $20,906.40
• Medicare tax (uncapped): $184,700.00 x 2.9% = $5,356.30
• Self-employment tax: $20,906.40 + $5,356.30 = $26,262.70

Notice that the Social Security tax is calculated on the capped $168,600, not the full $184,700 of net earnings; only the Medicare portion applied to the full amount. The deductible half here comes to $13,131.35.

What this doesn’t cover

A couple of things trip people up. First, self-employment tax is entirely separate from income tax. It’s not a substitute for it and it’s not a credit against it, it’s calculated on your net profit and owed in addition to whatever federal (and state) income tax you owe on that same profit. If you’re estimating your full tax bill for the year, you need to run both calculations, not just this one.

Second, half of your self-employment tax is deductible when figuring your income tax, even though you’re on the hook for the whole amount. That deduction exists because the “employer half” of the tax is treated, for income tax purposes, the same way it would be if an actual employer had paid it on your behalf, so it reduces your income tax base even though it doesn’t reduce the SE tax bill itself. It’s an above-the-line deduction, meaning you get it whether or not you itemize.

Finally, remember the 92.35% factor only affects how much of your profit is subject to SE tax; it has no bearing on income tax, which is still calculated on your full net profit (minus the SE tax deduction just mentioned, plus any other deductions you qualify for).

FAQ

Do I owe self-employment tax if I also have a W-2 job? Yes, on your self-employment income specifically. If your W-2 wages already used up some or all of the Social Security wage base for the year, that reduces (or eliminates) how much of your self-employment income is still subject to the 12.4% Social Security portion, though the 2.9% Medicare portion still applies regardless.

Does the 92.35% factor ever change? No, it’s a fixed figure written into the tax code, not something adjusted annually the way the wage base is. The wage base itself typically rises each year with national wage growth, so check the current year’s figure rather than relying on an old one.

Is self-employment tax the same as quarterly estimated tax? Not exactly. Self-employment tax is what you owe; estimated tax is how you pay it. Most self-employed people who expect to owe more than a small amount in total tax (SE tax plus income tax) make quarterly estimated payments throughout the year instead of one lump sum at filing time, mainly to avoid an underpayment penalty.

Use the Self-Employment Tax Calculator to run your own numbers.