Who Is Subject to Self-Employment Tax?

Individuals who work for themselves are responsible for paying their own Social Security and Medicare taxes, collectively known as the self-employment tax. This tax is analogous to the Federal Insurance Contributions Act (FICA) taxes that employers withhold from employee paychecks. For the self-employed, this means they are responsible for both the employee and employer portions of these taxes. Understanding who is liable for this tax is an important part of financial management for independent contractors, freelancers, and small business owners.

The Primary Test for Self-Employment Tax Liability

An individual is subject to self-employment tax if they have net earnings of $400 or more from self-employment activities. These rules apply regardless of age and even if the individual is already receiving Social Security or Medicare benefits. A different threshold applies to certain church employees. If an individual works for a church or a qualified church-controlled organization that has elected an exemption from employer Social Security and Medicare taxes, they are responsible for self-employment tax if they earn $108.28 or more in wages. This special rule ensures these employees are covered under the Social Security and Medicare systems.

Determining Your Worker Status

Correctly classifying a worker as an independent contractor or an employee determines self-employment tax liability. The IRS uses common law rules based on the degree of control a business has over the worker. These rules fall into three categories that examine the working relationship: Behavioral Control, Financial Control, and the Type of Relationship.

Behavioral control focuses on whether the business has the right to direct and control how the worker does their job. This includes instructions on when and where to work, what tools to use, or where to purchase supplies. Providing training to the worker on how to do the job suggests an employee relationship, as independent contractors are expected to have their own expertise.

Financial control examines whether the business has the right to direct or control the financial aspects of the worker’s job. This includes how the worker is paid, whether expenses are reimbursed, and who provides the tools and supplies. Independent contractors are more likely to have a significant investment in the equipment they use and are free to seek out other business opportunities. They also have the ability to realize a profit or incur a loss, which is a key indicator of being self-employed.

The type of relationship considers written contracts describing the intended arrangement. The presence of employee-type benefits, such as paid time off or health insurance, suggests an employee relationship. The permanency of the relationship is also a factor, as a relationship expected to continue indefinitely points toward employment, while one for a specific project suggests an independent contractor.

Federal tax law also defines certain workers as “statutory employees” or “statutory nonemployees.” Statutory employees, like certain delivery drivers or life insurance agents, are treated as employees for Social Security and Medicare tax purposes. Conversely, statutory nonemployees, such as direct sellers and licensed real estate agents, are treated as self-employed if their payment is based on sales rather than hours worked.

Calculating Net Earnings from Self-Employment

To find your net earnings from self-employment, you subtract the costs of running a business from its gross income. The process begins by identifying all income from the trade or business, which is reported on Schedule C (Profit or Loss from Business) of Form 1040.

From this gross income, you subtract ordinary and necessary business expenses. An ordinary expense is one that is common in your type of business, while a necessary expense is one that is helpful and appropriate. Common deductible expenses include office supplies, advertising costs, rent for a business location, and business-related travel.

For those who use their vehicle for business, they can deduct the actual expenses of operating the car or use the standard mileage rate. Individuals who use a portion of their home exclusively and regularly for their business may also claim a home office deduction. It is important to keep records and receipts for all claimed expenses to substantiate the deductions.

How Self-Employment Tax is Calculated and Paid

The tax calculation is a multi-step process reported on Schedule SE (Self-Employment Tax). First, you multiply your net earnings from self-employment by 92.35% to find the amount subject to the tax. This adjustment accounts for the fact that employees do not pay FICA tax on the portion their employer pays.

The self-employment tax rate is 15.3%, which is composed of two parts: a 12.4% Social Security tax and a 2.9% Medicare tax. The 12.4% Social Security tax applies only up to a certain income limit each year, which is $176,100 for 2025. All earnings subject to self-employment tax are subject to the 2.9% Medicare tax, with no income limit.

You can deduct one-half of your self-employment tax paid on your Form 1040, which reduces your adjusted gross income (AGI). This is an above-the-line deduction, meaning you do not need to itemize to claim it. This deduction helps equalize the tax treatment between self-employed individuals and employees.

The net earnings figure from Schedule C is carried over to Schedule SE to calculate the tax. The final amount is then reported on Schedule 2 of Form 1040 and added to your total income tax liability. Because these taxes are not withheld, self-employed individuals are required to pay estimated taxes quarterly to avoid penalties.