Self-Employment Tax Basics
Self-employed individuals pay both employee and employer portions of Social Security and Medicare taxes, totaling 15.3% (12.4% Social Security + 2.9% Medicare) on 92.35% of net earnings. On $80,000 net earnings after $10,000 in deductions, self-employment tax is about $9,700. This is in addition to regular income tax, making the total tax burden for self-employed significantly higher than W-2 employees.
However, you can deduct half of self-employment tax from taxable income, reducing income tax somewhat. Also, maximizing business deductions is crucial - home office, equipment, mileage, supplies, insurance, and professional services all reduce taxable income. Good recordkeeping and working with a tax professional typically pay for themselves many times over in tax savings.
Self-employed individuals must make quarterly estimated tax payments to avoid penalties. Calculate expected annual income, determine total tax (SE tax + income tax), and divide by four. Pay by April 15, June 15, September 15, and January 15. Set aside 25-35% of gross income for taxes in a separate account to avoid cash flow problems when payments are due.
Quick Tips
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Frequently Asked Questions
Generally 25-35% of gross income. This covers self-employment tax (~15%) plus federal income tax (10-37%) and state tax (0-13%). Higher earners should set aside more. Keep tax money in a separate account.
Home office (if dedicated space), equipment and supplies, mileage (67 cents/mile in 2024), health insurance, retirement contributions, professional services, marketing, software subscriptions, education, and meals (50%). Keep detailed records.
You pay both employee and employer FICA portions (15.3% vs 7.65% for employees), but you can deduct business expenses employees can't. Total tax burden is often similar if you maximize deductions, but cash flow is different.
Quarterly estimated payments due April 15, June 15, September 15, and January 15 for the prior quarter. Underpayment incurs penalties and interest. Pay at least 90% of current year tax or 100% of prior year tax to avoid penalties.
Maximize business deductions to reduce net earnings. Contribute to SEP-IRA or Solo 401(k) (deductible). Consider S-Corp election if earning $60k+ - pay yourself reasonable salary (subject to SE tax) and take remaining as distributions (not subject to SE tax).