An employee splits Social Security and Medicare with their employer. When you work for yourself, you pay both halves. That's self-employment tax, and it's on top of income tax.
The rules
- The rate is 15.3%: 12.4% Social Security plus 2.9% Medicare.
- It applies to 92.35% of your net profit, after business expenses.
- Social Security stops at the $184,500 wage cap, and W-2 wages use up that cap first.
- Above $200,000 ($250,000 joint), an extra 0.9% Additional Medicare Tax applies.
- You owe nothing if net earnings are under $400.
- You deduct half of the tax when figuring your income tax.
Example: $60,000 of profit
| Step | Amount |
|---|---|
| Net profit | $60,000 |
| × 92.35% = net earnings | $55,410 |
| Social Security (12.4%) | $6,871 |
| Medicare (2.9%) | $1,607 |
| Self-employment tax | $8,478 |
Half of that, $4,239, comes off your income before income tax is figured. As an employee earning the same, you'd pay only the half your employer doesn't cover.
Paying it during the year
Nobody withholds it for you, so most self-employed people send the IRS quarterly estimated payments to avoid an underpayment penalty.
Try it yourself