Is Self-Employment Tax in Addition to Income Tax?
Demystify the tax landscape for self-employed professionals. Understand the layers of taxation on your business earnings.
Individuals earning income outside of traditional employment, such as freelancers, independent contractors, or small business owners, encounter two primary federal tax categories: self-employment tax and federal income tax. Both apply to earnings from self-employment activities. This article clarifies each tax and explains how they interact to determine a self-employed individual’s total tax liability.
Understanding Self-Employment Tax
Self-employment tax is a federal tax that primarily funds Social Security and Medicare. This tax is comparable to the FICA taxes withheld from an employee’s wages. However, unlike employees who share the FICA tax burden with their employers, self-employed individuals are responsible for both the employee and employer portions.
Self-employed individuals, such as sole proprietors, independent contractors, and partners, are subject to this tax. The self-employment tax rate is 15.3% on net earnings from self-employment, consisting of 12.4% for Social Security and 2.9% for Medicare. The Social Security portion applies up to an income limit, which for 2025 is $176,100, while the Medicare portion applies to all net earnings without a wage base limit. The tax is calculated on your net earnings from self-employment, which is gross income minus allowable business expenses.
Understanding Income Tax for Self-Employed Individuals
Federal income tax applies to all taxable income, including profits earned from self-employment. For self-employed individuals, income from their business or independent contracting work is considered taxable income, similar to wages earned by an employee. This income is not subject to federal income tax withholding by an employer, so the self-employed individual is solely responsible for remitting these taxes.
To determine net income subject to federal income tax, self-employed individuals calculate their gross business income and then subtract all eligible business expenses. These allowable deductions can significantly reduce the income ultimately subject to tax. Common deductions include expenses for a home office, business travel, supplies, and professional development. Once net profit is determined, it is subject to standard federal income tax rates based on the individual’s filing status and overall income level.
The Coexistence of Self-Employment and Income Taxes
Individuals earning income from self-employment are responsible for paying both self-employment tax and federal income tax on their net earnings. These are two distinct tax obligations, calculated separately, though based on the same underlying self-employment income. Self-employment tax covers contributions to Social Security and Medicare, while federal income tax applies to the individual’s total taxable income, including self-employment profits.
A primary interaction involves a specific deduction. When calculating adjusted gross income (AGI) for federal income tax purposes, self-employed individuals can deduct one-half of the self-employment tax paid. This deduction offsets that self-employed individuals pay both the employer and employee portions of Social Security and Medicare taxes, unlike traditional employees whose employers pay half. The deduction reduces the individual’s net earnings subject to federal income tax, lowering their overall income tax liability.
Calculating and Paying Self-Employment Tax
To calculate self-employment tax, first determine your net earnings from self-employment by subtracting allowable business expenses from gross business income. Only 92.35% of these net earnings are subject to self-employment tax. This adjustment places self-employed individuals on a similar footing to traditional employees, accounting for the employer’s share of FICA taxes. The 15.3% self-employment tax rate is then applied to this adjusted net earnings figure, with the Social Security portion (12.4%) applying up to the annual income limit and the Medicare portion (2.9%) applying to all earnings.
Since no employer withholds taxes, self-employed individuals are required to pay estimated taxes throughout the year to cover both self-employment tax and federal income tax obligations. These payments are generally made quarterly, with due dates in April, June, September, and January of the following year. Estimated tax payments ensure taxpayers meet their tax liability as income is earned, helping to avoid potential underpayment penalties. Payments can be made electronically through various methods, including the IRS Direct Pay system or the Electronic Federal Tax Payment System (EFTPS).