Understanding Self-Employment Tax: A Comprehensive Guide for the Self-Reliant

Self-employment tax is a crucial aspect for individuals who operate their own businesses, essentially working for themselves. This tax primarily covers Social Security and Medicare, mirroring the taxes withheld from the wages of traditionally employed individuals. It’s important to note that when we discuss self-employment tax, we are specifically referring to these Social Security and Medicare taxes, and not other potential taxes applicable to self-employed individuals.

While employers typically handle the calculation and withholding of Social Security and Medicare taxes for employees, as a self-employed individual, the responsibility falls on you. You’ll need to calculate your self-employment tax (SE tax) using Schedule SE, Self-Employment Tax, (Form 1040 PDF or 1040-SR). A notable benefit for self-employed individuals is the ability to deduct the employer-equivalent portion of your SE tax when determining your adjusted gross income, a deduction not available to wage earners for their Social Security and Medicare taxes.

Decoding the Self-Employment Tax Rate

The self-employment tax rate stands at 15.3%. This is composed of two parts: 12.4% for social security (covering old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).

For the year 2024, the first $168,600 of your combined earnings from wages, tips, and net self-employment income is subject to the social security portion of self-employment tax, social security tax, or railroad retirement (tier 1) tax, or a combination thereof. For historical SE tax rates, you can consult Schedule SE for previous years.

It’s crucial to understand that if your total wages and tips already subject to social security tax or railroad retirement tier 1 tax reach or exceed $168,600, you are not required to pay the 12.4% social security part of the SE tax on your net earnings. However, all of your net earnings remain subject to the 2.9% Medicare part of the SE tax.

Furthermore, an Additional Medicare Tax of 0.9% applies to earnings exceeding certain threshold amounts, depending on your filing status. These thresholds are:

Filing status	Threshold amount
Married filing jointly	$250,000
Married filing separate	$125,000
Single	$200,000
Head of household (with qualifying person)	$200,000
Qualifying surviving spouse with dependent child	$200,000

For detailed information on this, refer to the Questions and answers for the additional Medicare tax page.

If your tax year differs from the calendar year, it’s important to use the tax rate and maximum earnings limit effective at the beginning of your tax year. Consistency is key—even if these figures change during your tax year, you must continue using the initial rate and limit throughout your tax year.

Leveraging the Self-Employment Tax Deduction

A significant advantage for self-employed individuals is the ability to deduct the employer-equivalent portion of their self-employment tax when calculating their adjusted gross income. This deduction specifically influences your income tax liability and does not alter your net earnings from self-employment or the amount of your self-employment tax itself.

If you file Form 1040, Individual Income Tax Return, or Form 1040-SR, U.S. Income Tax Return for Seniors, alongside Schedule C, Profit or Loss from Business, you might also qualify for the Earned Income Tax Credit (EITC). You can explore your eligibility further by learning more about EITC or by using the EITC Assistant.

Health Insurance Deduction for the Self-Employed

Self-employed individuals can also benefit from deducting health insurance costs. Section 2042 of the Small Business Jobs Act allows for an income tax deduction for health insurance expenses. This deduction is factored into the calculation of net earnings from self-employment. For detailed guidance on calculating and claiming this deduction, refer to the Instructions for Form 1040 and Form 1040-SR PDF and Instructions for Schedule SE PDF.

Determining Who Pays Self-Employment Tax

You are obligated to pay self-employment tax and file Schedule SE (Form 1040 or Form 1040-SR) if either of these conditions is met:

Your net earnings from self-employment (excluding church employee income) totaled $400 or more.
You earned $108.28 or more in church employee income.

Generally, your net earnings from self-employment are subject to self-employment tax. If you operate as a sole proprietor or independent contractor, you typically use Schedule C to calculate your net earnings from self-employment.

To accurately determine your net earnings subject to self-employment tax, utilize Schedule SE. Before calculating net earnings, you’ll generally need to determine your total earnings that are subject to self-employment tax.

Important Note: Age is not a factor in self-employment tax obligations. These rules apply regardless of your age and even if you are already receiving Social Security or Medicare benefits.

Special Considerations for Family Caregivers

Specific guidelines apply to individuals providing in-home care services for elderly or disabled individuals. Often, caregivers are considered employees of those they care for because the care recipients have the authority to direct their work. For more detailed information, consult the Family caregivers and self-employment tax page and Publication 926, Household Employer’s Tax Guide,.

Methods for Paying Self-Employment Tax

To fulfill your self-employment tax obligations, you must possess either a Social Security number (SSN) or an individual taxpayer identification number (ITIN).

Obtaining a Social Security Number

If you’ve never been assigned an SSN, you can apply for one using Form SS-5, Application for a Social Security Card. This form is available at any Social Security office or by calling 800-772-1213. You can also download the form from the Social Security number and card website.

Obtaining an Individual Taxpayer Identification Number

The IRS issues ITINs to nonresident or resident aliens who are not eligible for an SSN. To apply for an ITIN, you need to file Form W-7, Application for IRS Individual Taxpayer Identification Number PDF.

Paying Through Estimated Taxes

Self-employed individuals are often required to pay estimated taxes on a quarterly basis. These estimated tax payments can be used to cover your self-employment tax liability. For comprehensive details on paying self-employment tax through estimated taxes, refer to the Estimated taxes page and Publication 505, Tax Withholding and Estimated Tax.