Your guide to self-employment tax

A 15.3% tax on most income that isn’t reported on a W-2 form

Derek Silva

By

Derek Silva

Derek Silva

Personal Finance Expert

Derek is a personal finance editor at Policygenius in New York City, and an expert in taxes. He has been writing about estate planning, investing, and other personal finance topics since 2017. He especially loves using data to tell a story. His work has been covered by Yahoo Finance, MSN, Business Insider, and CNBC.

Updated August 9, 2021|6 min read

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All employers are required to withhold certain taxes from their employees’ pay. These include the FICA taxes, which help fund Social Security benefits and Medicare. Self-employed individuals don’t have an employer to withhold that tax, and so they need to pay the entire tax themselves, in the form of self-employment tax, sometimes called SE tax or SECA tax.

Self-employment tax is a 15.3% tax that individuals must pay on their income unless an employer already withheld tax from it. The most common way to pay SE tax is through estimated payments to the IRS each quarter.

There are multiple forms you will need to fill out to report self-employment income on your federal tax return: Form 1040 Schedule C, Schedule SE, Schedule 1, and Schedule 2. These forms also walk you through the self-employment tax deduction, worth half of your total self-employment tax.

Key Takeaways

  • You must pay self-employment tax if you had at least $400 of net income that didn’t already have taxes withheld from it by an employer

  • Self-employment tax is 15.3% of your income and covers the Social Security tax (12.4%) and Medicare tax (2.9%)

  • You can pay your tax by filing estimated taxes each quarter

  • When you file your annual tax return, you can deduct half of your SE tax with the self-employment tax deduction

What is self-employment tax?

Self-employment tax is a 15.3% tax — covering Social Security and Medicare taxes — that individuals must pay if they have income that wasn’t already taxed by an employer. When you file your tax return, self-employment tax is added to the rest of your income tax to determine the total tax you owe for the year.

Self-employment tax replaces the FICA taxes, which most employees pay out of each paycheck. Employers automatically withhold FICA taxes so if you don’t have an employer withholding taxes, the IRS requires you to pay the proper amount yourself.

How much is self-employment tax?

The self-employment tax rate is 15.3% and it covers two separate taxes: 12.4% goes to Social Security and 2.9% goes toward Medicare. Normally, an employee only has to pay half of these taxes (7.65%) in the form of FICA tax, and their employer pays the remaining half. For self-employed workers and contractors without an employer to withhold the taxes, they must pay the entire 15.3% themselves. However, half of the self-employment tax is deductible through the self-employment tax deduction.

Learn about other potential tax savings with these 53 tax deductions for 2021.

Who needs to pay self-employment tax

You need to pay self-employment tax if you meet either of these two criteria:

  • You have net earnings of at least $400 from self-employment.

  • You have income of $108.28 or more from working as a church employee.

People who may have to pay self-employment tax include freelance workers, independent contractors, sole proprietors, farmers, and some partnerships. People who work in the gig economy likely need to pay SE tax. If you have self-employment income from multiple jobs or multiple businesses that you own, your combined earnings will determine whether you need to pay SE tax.

Related: Tax tips for Uber, Lyft, and other ride-share drivers

What is self-employment income?

Self-employment income is anything you earned that didn’t already have tax withheld, and it’s often reported to you on a 1099-MISC or 1099-NEC. You may get a Schedule K-1 for certain types of income, but they likely aren’t self-employment income unless explicitly stated (like if it’s listed in box 14). Income reported on a W-2 form should already have had tax withheld and it isn’t self-employment income.

Net self-employment income

Self-employment tax only applies to your net earnings, which generally means your net profit, or your gross income minus business expenses. So if you made $1,500 from self employment but only $300 was profit, then you don’t have to pay self-employment income tax.

Self-employment income for church employees

Church employee income doesn’t include any wages you made from working as a minister, a member of a religious order, or a Christian Science practitioner. You will need to pay the self-employment tax for any other church income of more than $108.28 (or if you have more than $400 from other sources of income). Church employees are exempt from self-employment tax if they filed Form 4361 (an application for exempting ministerial income). Learn more about tax for church employees from the IRS instructions for Schedule SE.

Other examples of self-employment income

The following types of income may also count toward your net self-employment earnings:

  • Rental income from a farm

  • Payments from the Department of Agriculture for your participation in a land diversion program

  • Payments for the use of rooms or other space you provided to a tenant, including hotel rooms, parking lots, storage spaces, tourist camps, and trailer parks

  • Income from selling newspapers, if you’re at least 18 years old and kept the retail profits

  • Certain commissions you received for work as a self-employed insurance agent or salesperson

  • Income from a fishing vessel with a crew of less than 10 workers

  • Fees paid to you for your work as a fee-based state or local government official

  • Income (or loss) from the trade of section 1256 contracts, such as regulated futures contracts, foreign currency contracts, or dealer equity options

Notable exceptions from self-employment net earnings are fees you receive for your work as a notary public and certain transactions involving timber, coal, or domestic iron ore.

How to pay self-employment tax

If you have income from self employment, you may need to pay self-employment tax by making a quarterly estimated tax payment to the IRS. Not everyone needs to pay estimated tax. The official IRS guidance is that you should make estimated tax payments if you will have a tax bill of $1,000 or more when you file your federal income tax return. [1] Failing to do so could result in tax penalties. If you will have a smaller bill, you may still want to make estimated payments so that you owe a smaller bill (or no bill at all) when you file your annual tax return.

If you have an employer who sends you a W-2 and you earn self-employment income outside of that job, you can avoid estimated taxes by asking your employer to withhold more tax from your paychecks. To withhold more from your paychecks, you need to submit a new W-4 form to your employer. Filing a W-4 is free and you may be able to do it all electronically. Make sure to fill out a W-4 for you federal taxes as well as the equivalent state tax form if your state has an income tax.

How to file a tax return with self-employment tax

When you file your annual income tax return, you may need to complete some extra tax forms because of your self-employment income. Here are the basic forms you’ll need:

  • Form 1040: Standard income tax form that everyone uses

  • Schedule C: Necessary to determine your net profit (net earnings)

  • Schedule SE: To calculate your self-employment tax and your self-employment tax deduction

  • Schedule 1: To list your net profit from Schedule C and your self-employment tax deduction

  • Schedule 2: To list the value of your self-employment tax

If you use one of this year's best tax-filing services, it will handle all calculations for you, but you can see the general process of filing SE tax below. For help with the rest of your tax return, try our guide to Form 1040.

Step 1: Calculate your net earnings

Start by filling out Schedule C. Schedule C takes you through calculating your net profit or loss from self-employment. To complete Schedule C, gather all forms or invoices that list your income. Common income forms are Form 1099-MISC, Form 1099-NEC, and Schedule K-1. If you have no business expenses or losses, then all of your income is profit.

Write your net profit (or loss) on Schedule 1. Schedule 1 is also where you report additional income — like unemployment benefits — and claim certain deductions — like the student loan interest deduction.

Step 2: Calculate your self-employment tax

Next, fill out Schedule SE to calculate your actual self-employment tax. This form will require you to list your net profit from Schedule C as well as any income you have from a Schedule K-1. After calculating your tax, you need to write it on Schedule 2.

Your self employment tax is calculated as follows:

  • First, calculate 92.35% of your net earnings, because only that amount is subject to SE tax. If the result is less than $400, you don’t owe any self-employment tax.

  • Second, calculate 12.4% of your first $142,800 of net earnings, for Social Security tax. For 2021, you have to pay Social Security tax on your earnings up to $142,800, so the maximum possible Social Security tax for 2021 is $17,707.20. [2]

  • Third, calculate 2.9% of your net earnings for Medicare tax, and add it to the value of your Social Security tax. All of your income is subject to Medicare tax, unlike Social Security tax.

  • Fourth, you may need to calculate an additional Medicare tax of 0.9% on your earnings above $200,000 if you’re a single filer, head of household, or qualifying widow(er); $250,000 if you’re married filing jointly; or $125,000 if you’re married filing separately. This is sometimes called the Medicare surtax.

Read more on how to choose a filing status.

Step 3: Determine your self-employment tax deduction

After finding your tax, you can use Schedule SE to calculate your self-employment tax deduction, which is worth half of your tax amount. To calculate your self-employment tax deduction, multiply your self-employment tax by 50%. Write the value of your deduction on Schedule 1.

The deduction does not decrease the value of your self-employment tax. It is factored in after you calculate your tax and it decreases the overall income tax you owe. It’s an above-the-line deduction, so you can take it even if you claim the standard deduction.