Self-Employment Tax

If you are self-employed, in addition to paying federal and state income taxes, you also have to pay “self-employment” tax. Self-employment tax replaces the payroll taxes employees, and their employers, pay at “normal” jobs.

It is important to understand self-employment tax, because it is good to understand your tax situation in general. It is also easy for self-employed people to not properly consider their self-employment tax and how it impacts their true "net pay."

For example, it is easy for someone to become an independent contractor and think they are making the same as they would being an employee with the same pay rate – when in fact they will end up with less after paying their self-employment tax.

Payroll taxes for a “normal” job

If you have a “normal” job, you may have noticed four different types of tax being withheld from your paycheck: federal, state (if you live in a state with income tax), Social Security tax, and Medicare tax.

Social Security tax is 6.2% of your taxable wages up to the cap, which in 2025 is $176,100 – so if you make over $176,100 in 2025, you don’t have to pay Social Security tax on compensation over this amount. Medicare tax is 1.45% of your taxable wages, with no cap. So, the total you pay between Social Security tax and Medicare tax is 7.65% (6.2% + 1.45%). What you may not know is that your employer also pays an equal amount of Social Security and Medicare tax.

Social Security tax and Medicare tax can also be refereed to as:

• FICA tax, which stands for Federal Insurance Contributions Act.

• Employment tax.

• Payroll tax.

Self-employment tax

Self-employment tax takes the place payroll taxes for self-employed people. The self-employed person has to pay the equivalent of both sides of the tax – the employee portion and the employer portion.

However, it is not quite as simple as taking your net self-employment income and multiplying it by 15.3% (7.65% * 2). The steps are as follows:

1. Net Income. Take your net profit from self-employment (for example, a business or farm). Note that this is revenue (sales) minus business expenses.

2. 92.35%. Multiple the net profit by 92.35%.

3. Social Security Tax. Multiply the result from step 2 by 12.4% (6.2% * 2), but only up to the Social Security wage cap. This is your Social Security tax. There can be some adjustments for tips, that we won’t go into here.

4. Medicare Tax. Multiply the result from step 2 by 2.9% (1.45% * 2). This is your Medicare tax.

5. Self-Employment Tax. Add the results from step 3 and step 4. This is your total self-employment tax.

Also, half of your self-employment tax is deductible for income tax purposes.

Example

Joe owns a consulting business. He makes $98k after all of his business expenses. He will owe $13,847 of self-employment tax. This is in addition to his normal federal income taxes and state income taxes.

Here are the calculations:

Things to keep in mind 

• As mentioned, self-employment tax is in addition to federal and state income tax. Particularly at lower levels of income, self-employment tax can be a large portion of your tax burden.

  • Someone could be paying 8% federal tax and 3% state tax, while paying about 14% in self-employment tax.

• It is important to consider self-employment tax if you are an independent contractor. Your contract will need to be for more than you would otherwise make as an employee, to end up in the same spot after taxes.

• If you are self-employed, you may need to make estimated payments, so you don’t owe a large amount of self-employment tax when you file. If you underpay significantly, you can owe penalties and interest.

If you have any comments, questions, or ideas for future posts, please let me know

I hope you found this post helpful and educational. If you have any comments, questions, or ideas for future posts, please let me know. You can reach me directly via email at crawford@ulmerfinancial.com.