Why do I owe self-employment tax on top of income tax?
Self-employment tax covers Social Security and Medicare, which are separate from income tax. Employees pay these through payroll, but you pay them directly.
Tax guide
What Is Self-Employment Tax?
Self-employment tax is the 15.3 percent you pay to fund Social Security and Medicare when you work for yourself instead of for an employer.
When you are an employee, you and your employer split the cost of Social Security and Medicare. When you work for yourself, you cover both halves, which together make up the 15.3 percent self-employment tax. That breaks down into 12.4 percent for Social Security and 2.9 percent for Medicare.
This tax is separate from regular income tax and is calculated on your net self-employment profit using Schedule SE. Only the Social Security portion applies up to an annual wage base limit, while the Medicare portion has no cap. You can also deduct half of your self-employment tax when figuring your income tax, which softens the impact a bit.
Because no one is withholding this for you, self-employment tax is a major reason freelancers often need to make quarterly estimated payments. Planning for it ahead of time helps avoid a surprise bill.
In short
Key points
- Funds Social Security and Medicare for self-employed people
- Total rate is 15.3 percent on net self-employment profit
- Made up of 12.4 percent Social Security and 2.9 percent Medicare
- You pay both halves because there is no employer to split it
- You can deduct half of the self-employment tax on your income tax
- It is separate from and in addition to regular income tax
FAQ
Frequently asked questions
Is the whole 15.3 percent really mine to pay?
Yes, because you act as both the employer and the employee. You can, however, deduct half of it when calculating your income tax.
What income is self-employment tax based on?
It is based on your net profit from self-employment after expenses, not your gross income, and it is calculated on Schedule SE.
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