Do You Pay Self Employment Tax and Income Tax?
Understand the dual tax obligations for self-employed individuals, how they interact, and practical steps for calculation and payment.
Understand the dual tax obligations for self-employed individuals, how they interact, and practical steps for calculation and payment.
Self-employment offers individuals the flexibility to pursue their professional endeavors independently, but it also introduces unique tax responsibilities. Unlike traditional employees whose taxes are typically withheld from each paycheck, self-employed individuals are solely responsible for calculating and remitting their own tax obligations.
Self-employment tax represents an individual’s contribution to Social Security and Medicare, federal programs providing benefits for retirement, disability, and healthcare. The self-employment tax rate is 15.3% of net earnings from self-employment.
This 15.3% rate is divided into two parts: 12.4% for Social Security and 2.9% for Medicare. The Social Security portion applies to net earnings up to an annual limit, which for 2025 is $176,100. There is no earnings limit for the Medicare portion, meaning it applies to all net earnings from self-employment. Individuals generally owe self-employment tax if their net earnings from self-employment are $400 or more. This includes sole proprietors, independent contractors, freelancers, and partners in a partnership.
Federal income tax applies to the net earnings generated from self-employment activities. For self-employed individuals, taxable income is determined by subtracting allowable business deductions from gross income. This calculation mirrors how income tax is levied on wages for employees, but the mechanism for payment and reporting differs significantly.
Business expenses play a significant role in reducing this taxable income. These expenses must be both ordinary and necessary for the business operation.
Self-employed individuals are typically responsible for paying both self-employment tax and federal income tax. These two distinct tax obligations are connected through a specific deduction designed to alleviate some of the tax burden on self-employed individuals. A crucial link is the deduction allowed for one-half of the self-employment tax paid.
This deduction is taken against gross income to arrive at adjusted gross income (AGI) for income tax purposes. For instance, if a self-employed individual owes a certain amount in self-employment tax, half of that amount becomes a deduction on their income tax return. This mechanism acknowledges that self-employed individuals pay both the employer and employee portions of Social Security and Medicare taxes, whereas traditional employees only pay the employee portion.
Calculating self-employment tax and income tax involves specific forms and processes. Initially, net earnings from self-employment are determined by reporting business income and expenses on Schedule C, Profit or Loss from Business (Form 1040). This schedule summarizes all revenues and deductible expenses, with the resulting net profit or loss transferring to Form 1040, the U.S. Individual Income Tax Return.
Self-employment tax is then calculated using Schedule SE, Self-Employment Tax (Form 1040). This form applies a 15.3% rate to 92.35% of the net earnings from self-employment, accounting for the Social Security earnings limit. The amount of self-employment tax determined on Schedule SE is then used to calculate the one-half self-employment tax deduction, which is reported on Schedule 1 (Form 1040) and reduces adjusted gross income for income tax purposes.
Since taxes are not withheld from self-employment income, individuals must generally pay estimated taxes throughout the year. This is typically done through quarterly payments using Form 1040-ES, Estimated Tax for Individuals. These payments cover both the individual’s income tax and self-employment tax liability. Estimated tax payments are generally due on April 15, June 15, September 15, and January 15 of the following year, with adjustments if a due date falls on a weekend or holiday. Failure to make sufficient estimated payments can result in penalties.