How Self-Employment Tax Works

Individuals who work for themselves must pay self‑employment tax to cover Social Security and Medicare contributions that traditional employees split with their employers. The self‑employment tax rate is 15.3% on net earnings: 12.4% funds Social Security old‑age, survivors, and disability insurance, while 2.9% supports Medicare. Because there is no employer to share the burden, sole proprietors, freelancers, and independent contractors shoulder the entire amount. To approximate the tax base, the IRS allows self‑employed workers to multiply their net income by 92.35%, effectively recognizing a deduction for the employer portion. The formula for taxable self‑employment income is $I=N\times 0.9235$ where $N$ represents net profit.

Social Security contributions apply only up to an annual wage base, which for 2024 is $168,600. When self‑employed individuals also earn wages from employment, those wages count toward the limit. Our calculator accounts for W‑2 wages by reducing the remaining Social Security base available to self‑employment income. The Social Security component of the tax is therefore $\mathrm{SS}=r\_\mathrm{SS}\times \mathrm{\backslash min}(I,B-W)$, where $r\_\mathrm{SS}$ is 12.4%, $B$ the wage base, and $W$ wages already subject to Social Security tax.

Medicare taxes apply to all taxable self‑employment income without a cap. Additionally, high earners owe an extra 0.9% Medicare surtax on combined wages and self‑employment income above $200,000 for single filers or $250,000 for married couples filing jointly. Our calculator determines the base Medicare liability as $M=0.029\times I$ and adds $M\_\mathrm{add}=0.009\times \max (0,I+W-T)$ when combined income exceeds the threshold $T$ for the chosen filing status.

Consider a freelancer with $80,000 in net earnings and no wages. Taxable self‑employment income equals $\mathrm{80,000}\times 0.9235=\mathrm{73,880}$. The Social Security tax is 12.4% of that amount, producing $9,164.72, and the Medicare tax is 2.9%, or $2,142.52. Total self‑employment tax equals $11,307.24. Because the income is below the additional Medicare surtax threshold, no extra 0.9% applies. The taxpayer may deduct half the total self‑employment tax as an adjustment to income when filing Form 1040, partially offsetting the burden.

When W‑2 wages exist, the computation changes. Suppose the same freelancer instead earns $50,000 in wages from a side job. The Social Security wage base remaining for self‑employment income is $118,600 ($168,600 – $50,000). The taxable self‑employment income remains $73,880, but only $73,880 of it is below the remaining wage base, so the Social Security tax stays $9,164.72. If wages had exceeded the wage base, the Social Security portion on self‑employment income would drop to zero. The Medicare tax remains $2,142.52, and combined wages plus net earnings of $130,000 are still below the additional Medicare threshold for single filers, so no surtax applies.

Self‑employment tax plays a significant role in estimated tax planning. Because the IRS expects quarterly payments when taxpayers owe $1,000 or more in tax for the year, freelancers often divide their anticipated self‑employment tax among four due dates. Failing to pay enough can trigger penalties even if a refund is due at filing time. Some states impose their own self‑employment or disability insurance taxes, compounding the need for diligent budgeting.

It is worth noting that self‑employment tax is assessed on net profit before accounting for the deduction for half the tax itself. On Schedule SE, taxpayers compute the tax, then claim half of it on Form 1040 Schedule 1 as an adjustment to income. This deduction lowers adjusted gross income, potentially qualifying the filer for other tax benefits that phase out with income. The recursive nature of the deduction is handled automatically by IRS worksheets; this calculator focuses on estimating the total liability rather than the above‑the‑line deduction.

For perspective, the table below lists recent Social Security wage bases and the combined self‑employment tax rate. These figures help contextualize how earnings levels interact with the cap:

Year	Wage Base	Self‑Employment Tax Rate
2022	$147,000	15.3%
2023	$160,200	15.3%
2024	$168,600	15.3%

Understanding self‑employment tax also influences entity choice. Some small‑business owners elect S corporation status and pay themselves a reasonable salary subject to payroll tax while taking additional profits as distributions not subject to self‑employment tax. Although this strategy can reduce taxes, it carries administrative costs and compliance obligations. Sole proprietorships and single‑member LLCs automatically fall under self‑employment tax rules without special elections, offering simplicity at the expense of higher payroll‑like taxes.

Our calculator operates entirely in your browser, safeguarding privacy. It simplifies several nuances—for example, it does not adjust the Social Security wage base for clergy exemptions, family employment situations, or optional methods available to low‑income farmers and fishermen. The outputs are educational estimates and not legal or tax advice. For detailed planning, especially when income fluctuates or multiple businesses are involved, consult a tax professional who can tailor advice and ensure compliance with quarterly payment requirements.

By modeling various income scenarios, you can anticipate the self‑employment tax hit before year‑end. Knowing this obligation helps set aside adequate reserves, evaluate the feasibility of tax‑advantaged retirement contributions, and decide whether forming an entity might provide savings. While self‑employment offers independence and potential for higher earnings, understanding associated taxes prevents unwelcome surprises. Use the calculator above to explore how changes in net income, wages, or filing status influence your Social Security and Medicare liabilities.