Self-Employment Tax: What You Need to Know

If you’re self-employed, taxes work a little differently than they do for traditional employees. One of the biggest differences is something called self-employment tax, often referred to as SE tax. Understanding how this tax works can help you avoid surprises and plan more effectively throughout the year.

Self-employment tax exists to cover Social Security and Medicare for individuals who work for themselves. When you’re an employee, these taxes are withheld from your paycheck, and your employer pays half on your behalf. When you’re self-employed, there is no employer—so you are responsible for paying the full amount yourself. SE tax helps fund Social Security retirement, disability, and survivor benefits, as well as Medicare coverage.

Many people wonder how self-employment tax compares to FICA taxes. In simple terms, they serve the same purpose. FICA taxes apply to employees and are split between the worker and employer, while self-employment tax applies to individuals who work for themselves and covers both portions.

You are required to pay self-employment tax if your net earnings from self-employment are $400 or more for the year. This applies to freelancers, independent contractors, sole proprietors, partners, and members of multi-member LLCs. Even if self-employment income isn’t your only source of income, it can still trigger SE tax if it meets that threshold.

Calculating self-employment tax starts with determining your net earnings using Schedule C. Once your net profit is calculated, it is multiplied by 92.35 percent to determine the portion subject to SE tax. That number is then multiplied by 15.30 percent to calculate the actual tax owed.

For 2025, the total self-employment tax rate is 15.30 percent. This rate is made up of 12.40 percent for Social Security, which applies to the first $176,100 of income, and 2.9 percent for Medicare, which applies to all income. An additional 0.9 percent Medicare tax applies to income over $200,000 for single filers and $250,000 for married couples filing jointly.

Because self-employment tax isn’t automatically withheld, most self-employed individuals pay it through quarterly estimated tax payments. Paying enough throughout the year is important to avoid penalties. In general, penalties can be avoided by paying at least 90 percent of the current year’s tax or 100 percent of the prior year’s tax liability. Maximizing legitimate deductions can also help reduce both income tax and self-employment tax.

Self-employment tax plays a crucial role in funding your future Social Security and Medicare benefits, but it can feel overwhelming—especially as your income grows or your situation becomes more complex. If you have questions or want help planning, Two Teachers’ Tax Service is here to help. Contact us at 269-449-8277 or email twoteacherstax@gmail.com for personalized guidance.

Two Teachers’ Tax Service

twoteacherstax.com

twoteacherstax@gmail.com

269-449-8277