What is Self-Employment Tax?
The Social Security and Medicare tax that freelancers pay on their net self-employment earnings, covering both employer and employee portions.
Definition
Self-employment tax is the US federal tax that self-employed individuals must pay on their net self-employment earnings. It covers Social Security and Medicare taxes — the same taxes that are split between an employee and employer in traditional employment. When you are self-employed, you are responsible for the full amount: 12.4% for Social Security (up to the annual wage base) and 2.9% for Medicare (with an additional 0.9% surtax on earnings above $200,000 for single filers). This makes the total self-employment tax rate 15.3% on net earnings up to the Social Security wage base.
Why Freelancers Pay Self-Employment Tax
In traditional employment, your employer pays roughly half of your Social Security and Medicare taxes as part of the cost of employing you. When you become self-employed, there is no employer to share this cost — so you pay both halves yourself. This is not an additional tax on top of income tax; it is the self-employed equivalent of the FICA taxes that would otherwise be split between you and an employer. The tax funds your future Social Security and Medicare benefits.
How to Calculate Self-Employment Tax
The calculation steps are: Step 1 — Calculate net self-employment earnings (gross freelance income minus deductible business expenses). Step 2 — Multiply by 0.9235 to get net earnings from self-employment (this accounts for the fact that Social Security only applies to 92.35% of net earnings). Step 3 — Apply the 15.3% tax rate to the result. Example: if your net freelance profit is $60,000, your net earnings for SE tax purposes are $60,000 × 0.9235 = $55,410. SE tax = $55,410 × 0.153 = $8,478. You also get an income tax deduction of half the SE tax ($4,239) from your gross income.
Self-Employment Tax vs. Income Tax
Self-employment tax is separate from — and in addition to — your regular federal income tax. You will pay both. Your freelance income is added to any W-2 income you have and taxed at ordinary income tax rates (10–37% depending on total income). However, you get two significant deductions related to self-employment: you can deduct half of your self-employment tax from your income (reducing your income tax), and you can deduct the cost of your health insurance premiums for yourself, your spouse, and dependents from your gross income.
Managing Self-Employment Tax as a Freelancer
Unlike W-2 employees who have taxes withheld from each paycheck, freelancers must set aside and pay self-employment tax themselves — through quarterly estimated tax payments. A common rule of thumb is to set aside 25–30% of each freelance payment you receive for taxes (both self-employment and income tax combined). The IRS requires quarterly estimated tax payments if you expect to owe $1,000 or more in taxes for the year. Use Eonebill's tax tracking features or work with a tax professional to calculate the right quarterly payment amount and avoid underpayment penalties.