Self-Employment Tax, Explained Simply

Self-employment tax is the Social Security and Medicare tax that people who work for themselves pay, covering both the employee and employer halves that a regular job would split.

When you have a W-2 job, your employer quietly pays half of your Social Security and Medicare tax and you pay the other half out of your paycheck. When you work for yourself, you are both parties. So you owe the whole thing. That combined rate is 15.3 percent, made up of 12.4 percent for Social Security and 2.9 percent for Medicare.

The Social Security portion only applies up to an annual wage cap, which adjusts each year. The Medicare portion has no cap, and higher earners pay an extra sliver on top. This tax is separate from and on top of the regular income tax you already owe.

There are two breaks that soften the blow. First, you only pay it on about 92.35 percent of your net self-employment earnings, not the full amount. Second, you get to deduct half of the self-employment tax you pay as an above-the-line adjustment, which lowers your income tax.

A quick example. Say you net $50,000 freelancing. Roughly $46,175 is subject to the tax, and 15.3 percent of that is about $7,065. You would owe that on top of income tax, but you could deduct around $3,532 of it against your income. Because no employer is withholding for you, most self-employed folks send in quarterly estimated payments to avoid a nasty surprise in April.

Bottom line: Self-employment tax is the full 15.3 percent Social Security and Medicare bill you cover yourself, but partial deductions and quarterly payments keep it manageable. Set money aside as you earn it.

This is general education, not tax advice. For your specific situation, check with a licensed tax professional.

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