Understanding Self-Employment Tax in 2024 & 2026
What is Self-Employment (SE) Tax?
When you work as a standard W-2 employee, your employer splits payroll taxes with you. You pay 7.65% for Medicare and Social Security, and your employer covers the other 7.65%. However, when you operate as a freelancer, independent contractor, or small business owner, the IRS considers you to be both the employee and the employer. This means you are responsible for the full 15.3% tax rate.
This 15.3% is composed of two parts: 12.4% for Social Security (up to an annual income threshold limit) and 2.9% for Medicare.
How to Calculate Your SE Tax
You don't pay SE tax on your gross revenue. You only pay it on your Net Profit (Gross Income minus Business Expenses). The IRS also allows you to calculate the SE tax on exactly 92.35% of your net earnings, rather than 100%. Finally, half of the SE tax is deductible from your adjusted gross income (AGI) when calculating your standard income tax.
Frequently Asked Questions
Do I have to pay self-employment tax if I made less than $10,000?
Yes. The IRS requires you to calculate and pay self-employment tax if your net earnings from self-employment were $400 or more in a tax year.
Is self-employment tax the same as income tax?
No. Self-employment tax goes specifically toward Medicare and Social Security. You still have to pay federal, state, and local income taxes on top of this amount.
How can I lower my self-employment tax?
The most effective way to lower your SE tax is by logging legitimate business expenses (tax write-offs). Every dollar you write off reduces your net profit, which directly lowers the base amount taxed at 15.3%. In some cases, electing S-Corp status can also reduce SE tax on distributions.