Do Contractors Pay Social Security and Medicare?

Independent contractors are responsible for paying their own Social Security and Medicare taxes. Unlike traditional employees, for whom employers withhold these taxes, contractors must handle these obligations themselves through the self-employment tax. The process involves calculating the tax based on business profit, using specific tax forms, and making regular payments to the IRS.

Understanding Self-Employment Tax

Self-employment (SE) tax is how independent contractors contribute to Social Security and Medicare, similar to the FICA taxes paid by employees and employers. The total SE tax rate is 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare.

Contractors are responsible for both the employee and employer portions of these taxes. In a standard employment arrangement, an employee pays 6.2% for Social Security and 1.45% for Medicare, and the employer matches these amounts, totaling 15.3%. Since a contractor acts as both employee and employer, they cover the entire amount.

Calculating Your Self-Employment Tax

The calculation of your self-employment tax begins with your net earnings from self-employment, which is your total business income minus all ordinary and necessary business expenses. The first step in the tax calculation is to multiply this net profit by 92.35%. This adjustment accounts for the deduction of one-half of your self-employment tax, effectively making only 92.35% of your net earnings subject to the tax.

The Social Security tax of 12.4% is applied to your adjusted net earnings up to an annual limit of $176,100 for the 2025 tax year. The Medicare tax of 2.9% is applied to the entire amount of your adjusted net earnings, as it has no annual limit. For example, if your net earnings are $80,000, your taxable base is $73,880 ($80,000 x 0.9235), and your total SE tax would be $11,303.64.

An Additional Medicare Tax of 0.9% may also apply if your earnings exceed certain thresholds. For 2025, these thresholds are $200,000 for single filers, $250,000 for married couples filing jointly, or $125,000 for married couples filing separately.

You can also take an income tax deduction for one-half of your self-employment tax. Using the previous example, you could deduct $5,651.82. This is an above-the-line deduction, meaning you do not need to itemize to claim it. It reduces your adjusted gross income (AGI) but does not reduce the amount of self-employment tax you owe.

Required Tax Forms

The process starts with Schedule C, Profit or Loss from Business, where you calculate your business’s net profit or loss for the year. You will report your gross receipts and subtract deductible business expenses like office supplies, vehicle mileage, and advertising costs.

The net profit from Schedule C is then transferred to Schedule SE, Self-Employment Tax, to calculate the amount of tax you owe. The results from Schedule SE are then reported on your main tax return, Form 1040, U.S. Individual Income Tax Return. The total self-employment tax is added to your income tax liability on Schedule 2, and the deduction for one-half of your SE tax is reported on Schedule 1.

How to Pay the Tax

Because independent contractors do not have taxes withheld, they are required to pay their tax liability throughout the year using estimated taxes. This pay-as-you-go system applies to both income tax and self-employment tax if you anticipate owing $1,000 or more in tax for the year. It helps avoid a large bill and potential underpayment penalties when filing an annual return.

The IRS has established four quarterly due dates for estimated tax payments: April 15, June 15, September 15, and January 15 of the following year. You can use Form 1040-ES, Estimated Tax for Individuals, which includes a worksheet to help you calculate the amount you should pay each quarter.

There are several ways to submit your estimated tax payments. You can mail a check or money order with a Form 1040-ES payment voucher. For electronic payments, you can use IRS Direct Pay to transfer funds from a bank account or the Electronic Federal Tax Payment System (EFTPS).

Special Considerations

For individuals who receive both W-2 income from an employer and 1099 income as a contractor, your W-2 wages are counted first toward the annual Social Security limit ($176,100 for 2025). If your employment wages already exceed this limit, you will not owe the 12.4% Social Security portion of the self-employment tax on your contractor income. You will still owe the 2.9% Medicare tax on all your net self-employment earnings, and the 0.9% Additional Medicare Tax may also apply.

A minimum earnings threshold exists for paying self-employment tax. If your net earnings from self-employment are less than $400 for the year, you are not required to pay the tax. In this case, you do not need to file Schedule SE, though you must still report the income on your tax return.

If your business operations result in a net loss for the year, as calculated on Schedule C, you do not have any net earnings from self-employment. Consequently, you will not owe any self-employment tax for that year.