What Is Self-Employment Tax (SST) & How Is It Calculated?
Understand self-employment tax for independent workers. Learn its purpose, accurate calculation, reporting methods, and available deductions.
Self-employment tax (SE tax) represents contributions to Social Security and Medicare for individuals who work for themselves. This tax ensures that self-employed individuals contribute to these federal programs, similar to how employees and their employers contribute through Federal Insurance Contributions Act (FICA) taxes. The purpose of self-employment tax is to provide coverage for retirement, disability, survivor benefits, and healthcare.
Understanding Self-Employment Tax
This tax comprises two distinct components: Social Security tax and Medicare tax. The Social Security portion funds old-age, survivors, and disability insurance, while the Medicare portion contributes to hospital insurance.
Individuals generally subject to self-employment tax include independent contractors, freelancers, and sole proprietors. Partners in a partnership and members of a multi-member limited liability company (LLC) treated as a partnership also typically pay this tax on their share of the business’s earnings. If net earnings from self-employment reach $400 or more, the individual is obligated to pay self-employment tax.
For the 2024 tax year, the combined self-employment tax rate is 15.3%. This rate is broken down into 12.4% for the Social Security portion and 2.9% for the Medicare portion. An important distinction for the Social Security component is an annual earnings limit. For 2024, the first $168,600 of combined wages, tips, and net earnings from self-employment are subject to the 12.4% Social Security tax. There is no income limit for the Medicare tax; all covered net earnings are subject to the 2.9% rate.
Calculating Self-Employment Tax
Calculating self-employment tax begins with determining your net earnings from self-employment. This amount is derived by subtracting all ordinary and necessary business expenses from your gross income generated through your self-employment activities. For many self-employed individuals, this net earnings figure is typically calculated on Schedule C (Profit or Loss from Business).
Only 92.35% of your net earnings from self-employment are considered taxable for this purpose. This adjusted net earnings figure then serves as the base for calculating the Social Security and Medicare tax components.
To illustrate, if a self-employed individual has $50,000 in net earnings, the amount subject to self-employment tax would be $50,000 multiplied by 0.9235, resulting in $46,175. The Social Security tax is then calculated by applying the 12.4% rate to this adjusted amount, up to the annual earnings limit of $168,600 for 2024. The Medicare tax is calculated by applying the 2.9% rate to the full $46,175, as there is no income limit for Medicare. The sum of these calculations yields the total self-employment tax due.
Reporting and Paying Self-Employment Tax
Self-employment tax is formally reported to the Internal Revenue Service (IRS) on Schedule SE (Form 1040), titled “Self-Employment Tax.” Schedule SE computes the tax owed on net earnings from self-employment. Information from Schedule C or partnership income on Schedule K-1 flows to Schedule SE for calculation.
Since self-employed individuals do not have taxes withheld from their income by an employer, they are typically required to pay their self-employment tax, along with any income tax, through estimated tax payments throughout the year. These payments are made using Form 1040-ES, Estimated Tax for Individuals. The estimated tax system requires taxes to be paid as income is earned.
The tax year is divided into four payment periods, each with a specific due date for estimated tax payments. For calendar year taxpayers, these due dates are generally April 15, June 15, September 15 of the current tax year, and January 15 of the following tax year. Making timely and sufficient estimated payments is important to avoid potential penalties for underpayment of tax.
Deductions Related to Self-Employment Tax
Self-employed individuals are permitted to deduct a portion of their self-employment tax when calculating their adjusted gross income (AGI). Specifically, one-half of the total self-employment tax paid is deductible. This deduction helps to equalize the tax treatment between self-employed individuals and traditional employees.
The rationale behind this deduction is to mirror the FICA tax structure for employees. In an employer-employee relationship, the employer pays half of the Social Security and Medicare taxes, and the employee pays the other half through payroll deductions. By allowing self-employed individuals to deduct half of their self-employment tax, the tax system acknowledges that they bear both the employer and employee portions of these taxes.
This deduction is taken as an adjustment to income on Schedule 1 (Form 1040), “Additional Income and Adjustments to Income.” By reducing the individual’s gross income, this deduction can lower their overall income tax liability. It is important to note that while this deduction reduces income subject to income tax, it does not reduce the actual amount of self-employment tax owed.