Self-Employment Taxes

The short version

If you work for yourself, you generally pay self-employment taxes. These taxes cover your Social Security and Medicare contributions, which are usually taken out of a regular employee's paycheck. Understanding self-employment taxes helps you plan for these payments and take allowed deductions, which can save you money.

The law this is built on

Every point below comes from the authority named next to it. Verify the current text before relying on it.

26 U.S.C. § 1401(a) (Social Security Tax)
This law imposes a tax on your "self-employment income" for Social Security benefits. This tax is a percentage of your earnings up to a certain amount each year.
Why it matters: This means a portion of your self-employment income goes towards funding your Social Security benefits when you retire or become disabled.
26 U.S.C. § 1401(b) (Medicare Tax)
This law imposes another tax on your "self-employment income" for Medicare benefits. This tax applies to all of your self-employment income.
Why it matters: This means another portion of your self-employment income helps pay for your healthcare coverage through Medicare when you are eligible.
26 U.S.C. § 1402(b) (Net Earnings from Self-Employment)
This section defines "net earnings from self-employment" as your gross income from any trade or business you run, minus the deductions allowed by law.
Why it matters: This definition is important because only your 'net earnings' are subject to self-employment tax, meaning business expenses can reduce your tax burden.
26 U.S.C. § 1402(a)(12) (Self-Employment Tax Deduction)
This rule allows you to deduct one-half of your self-employment taxes when calculating your adjusted gross income for income tax purposes.
Why it matters: This means you don't pay income tax on the full amount of your self-employment taxes, which lowers your overall tax bill.

Words you need to know

Self-Employment Tax: This is a tax consisting of Social Security and Medicare taxes, mainly for people who work for themselves. It replaces the Social Security and Medicare taxes that an employer normally withholds from an employee's pay.
Net Earnings from Self-Employment: This is the amount of income you make from your business after subtracting your allowed business expenses. Self-employment tax is calculated based on this net amount.
Estimated Taxes: These are taxes you pay throughout the year, usually in four installments, if you expect to owe taxes of a certain amount or more. Self-employed individuals typically pay estimated taxes because no employer withholds them.
Deductions: These are expenses you can subtract from your income before calculating your taxes. For self-employed people, common deductions include business expenses, health insurance premiums, and one-half of your self-employment taxes.
FICA: This stands for the Federal Insurance Contributions Act, which funds Social Security and Medicare. For employees, FICA taxes are withheld from their paychecks; for self-employed individuals, they are paid as self-employment taxes.

Your rights

✓You have the right to deduct legitimate business expenses to reduce your taxable income.
✓You can deduct one-half of your self-employment taxes from your gross income when calculating your income tax.
✓You have the right to pay your self-employment taxes in quarterly estimated payments throughout the year.
✓You are entitled to Social Security and Medicare benefits based on your self-employment contributions, just like employees.
✓You have the right to claim certain tax credits that may reduce your overall tax liability.

How the process actually works

1
Determine if you are self-employed
Ongoing
You are generally considered self-employed if you work for yourself as a freelancer, independent contractor, or business owner. This means you do not have an employer withholding taxes from your pay.
2
Calculate your net earnings
Throughout the tax year
Keep good records of all your business income and all your legitimate business expenses. Subtract your expenses from your income to find your net earnings from self-employment.
3
Calculate your self-employment tax
When preparing estimated taxes or annual return
Your self-employment tax is calculated on 92.35% of your net earnings from self-employment (26 U.S.C. § 1402(a)(12)). This is a combined Social Security and Medicare tax rate.
4
Calculate estimated income tax
When preparing estimated taxes
You must also estimate your federal income tax on your business profits, minus the deduction for one-half of your self-employment tax (26 U.S.C. § 164(f)).
5
Pay estimated taxes
April 15, June 15, September 15, January 15 (of the following year)
You typically pay your estimated self-employment and income taxes in four quarterly installments. These payments help you avoid penalties for underpaying taxes during the year.
6
File your annual return
April 15 (or October 15 with extension)
At the end of the year, you'll file your tax return, including Schedule C (Profit or Loss from Business) and Schedule SE (Self-Employment Tax), to finalize your tax liability and report all income and expenses.

Deadlines that can end your case

First Quarter Estimated Tax Payment
April 15
Covers income earned from January 1 to March 31.
Second Quarter Estimated Tax Payment
June 15
Covers income earned from April 1 to May 31.
Third Quarter Estimated Tax Payment
September 15
Covers income earned from June 1 to August 31.
Fourth Quarter Estimated Tax Payment
January 15 of next year
Covers income earned from September 1 to December 31 of the previous year. If this falls on a weekend or holiday, the deadline moves to the next business day.

Costly mistakes

✕Not tracking income and expenses: This makes it hard to calculate net earnings and claim all eligible deductions.
✕Failing to pay estimated taxes: This can lead to penalties for underpayment when you file your annual return.
✕Not understanding deductible expenses: Missing out on legitimate business deductions means you pay more in taxes than you need to.
✕Ignoring the self-employment tax deduction: Forgetting to deduct one-half of your self-employment tax increases your taxable income.
✕Confusing gross income with net income: Calculating self-employment tax on your total income before expenses, rather than your profit, leads to overpayment.
✕Waiting until the last minute: Rushing tax preparation can lead to errors and missed deadlines.

Your checklist

Set up a separate bank account for your business income and expenses.
Track all income and expenses using accounting software or a detailed spreadsheet.
Research common business deductions for your industry (e.g., home office, supplies, professional development).
Calculate your estimated self-employment and income taxes each quarter.
Make your quarterly estimated tax payments on time.
Keep copies of all tax-related documents for at least three years.
Review your tax situation annually and adjust estimated payments if your income changes significantly.
File Schedule C and Schedule SE with your annual federal tax return.

Common questions

What is the self-employment tax rate?

The self-employment tax rate is generally 15.3%. This is made up of 12.4% for Social Security (up to an annual income limit) and 2.9% for Medicare (on all net earnings). This tax applies to 92.35% of your net earnings from self-employment (26 U.S.C. § 1402(a)(12)).

Do I have to pay self-employment tax if I only make a little money?

You generally need to pay self-employment tax if your net earnings from self-employment are $400 or more in a year. This threshold is set by law.

Can I deduct health insurance premiums if I'm self-employed?

Yes, if you are self-employed and not eligible to participate in an employer-sponsored health plan, you can often deduct the cost of health insurance premiums for yourself, your spouse, and your dependents. This is an above-the-line deduction, meaning it reduces your adjusted gross income.

What happens if I don't pay estimated taxes?

If you don't pay enough tax through withholding or estimated tax payments, you may owe a penalty for underpayment of estimated tax. The penalty is usually calculated on the amount you underpaid.

How does the self-employment tax deduction work?

You can deduct one-half of your total self-employment taxes paid from your gross income when calculating your adjusted gross income (26 U.S.C. § 164(f)). This reduces the income amount on which you pay federal income tax, lowering your overall tax bill.

How this changes by state

Self-employment taxes (Social Security and Medicare) are federal taxes, so the rules for these are the same across all U.S. states. However, your state may also have its own income tax rules for self-employed individuals. Some states have income tax, and others do not. If your state has income tax, you may need to make separate estimated state tax payments. You can find your state's specific income tax rules and payment requirements on your state's Department of Revenue or Tax Commission website.

When you need a lawyer

You typically need a tax lawyer if you are facing an audit by the IRS related to your self-employment income, if you receive notices of substantial penalties or back taxes, or if you are considering complex business structures that have significant tax implications. A lawyer can also be helpful if you are dealing with business income that crosses state lines or international borders, or if you have complex deductions or disputes with the IRS.

Do this today

→Review your business income and expenses for the current year.
→Estimate your potential self-employment and income tax liability.
→Set up a system to track income and expenses going forward.

This lesson is legal information for educational purposes only, based on 26 U.S.C. § 1401 (SECA). It is not legal advice and does not create an attorney-client relationship.