How self-employment tax works
When you work as an employee, your employer withholds Social Security and Medicare taxes (FICA) from your paycheck — 7.65% from you and a matching 7.65% from your employer. When you're self-employed, you wear both hats and owe the full 15.3% on your net business profit, called self-employment (SE) tax.
The 92.35% rule
You don't pay SE tax on your entire net profit. The IRS lets you calculate SE tax on 92.35% of net profit — effectively deducting the employer-equivalent portion (7.65%) before applying the tax. Then you can deduct half of the SE tax itself from your adjusted gross income.
2025 Social Security wage base
The Social Security portion (12.4%) applies only to the first $176,100 of combined wages and self-employment income in 2025. Income above that cap is subject only to the 2.9% Medicare portion, plus the 0.9% Additional Medicare Tax above $200,000 (single) or $250,000 (married filing jointly).
If you have both W-2 wages and self-employment income, the calculator accounts for wages already subject to Social Security tax — you won't double-pay the Social Security portion above the annual cap.
Frequently asked questions
What is the self-employment tax rate for 2025?
The combined SE tax rate is 15.3% — 12.4% for Social Security (on the first $176,100 of net SE income in 2025) and 2.9% for Medicare (no income cap). High earners also owe an additional 0.9% Medicare tax on earned income above $200,000 (single) or $250,000 (married filing jointly).
Do I pay SE tax if I have a W-2 job too?
Yes, on your net self-employment income. However, the Social Security portion (12.4%) only applies up to the annual wage base ($176,100 in 2025) — combined across W-2 wages and SE income. The calculator accounts for W-2 wages already subject to Social Security tax.
How do quarterly estimated taxes work?
Self-employed individuals must pay taxes quarterly (April 15, June 15, September 15, January 15) since no employer withholds. Underpayment can trigger penalties. Use Form 1040-ES to calculate. The safe harbor: pay 100% of last year's tax (110% if AGI over $150,000) or 90% of this year's tax.
What is the deduction for self-employment tax?
You can deduct half of your SE tax from your adjusted gross income. This mirrors the employer half of FICA — effectively reducing your taxable income. The calculator shows this deductible portion in the results.
Should I form an S-Corp to reduce SE tax?
Possibly. S-Corp owners pay themselves a 'reasonable salary' (subject to FICA) and take additional profits as distributions (not subject to SE tax). For incomes above ~$80,000 net profit, the savings often exceed the additional accounting costs. Consult a CPA.
What business expenses can I deduct?
Any 'ordinary and necessary' expense related to your business: home office (simplified $5/sqft up to 300 sqft, or actual expenses), vehicle mileage (70¢/mile in 2025), equipment, software, professional development, business meals (50%), health insurance premiums (above-the-line), and retirement contributions to a Solo 401(k) or SEP-IRA.
What happens if I don't file quarterly estimates?
You'll owe an underpayment penalty (currently ~8% annualized on the shortfall) plus interest. The penalty is calculated on Form 2210. Safe harbors: pay 90% of current year tax OR 100%/110% of prior year tax through withholding or estimates.
Glossary of key terms
- Schedule C
- The IRS form self-employed individuals file to report business profit or loss. Flows into Schedule SE for SE tax calculation.
- Schedule SE
- The form used to calculate self-employment tax. Starts with 92.35% of net profit (from Schedule C).
- SE Tax Base
- 92.35% of net business profit. The remaining 7.65% represents the employer-equivalent portion, deductible from income.
- Quarterly Estimated Tax
- Prepayments of income and SE tax made four times per year (April, June, September, January) by self-employed individuals.
- Solo 401(k)
- A 401(k) plan for self-employed individuals with no employees (other than a spouse). Allows both employee and employer contributions — total up to $70,000 in 2025.
Common mistakes to avoid
- Not making quarterly estimated payments — penalties and interest compound quickly
- Commingling personal and business finances — makes tax preparation painful and triggers IRS scrutiny
- Forgetting to deduct the 50% employer-equivalent portion of SE tax from AGI
- Not tracking mileage and home office — two of the most-missed deductions for freelancers
- Assuming SE tax replaces income tax — you owe BOTH SE tax AND income tax on business profits
Pro tips
- Open a Solo 401(k) or SEP-IRA — contributions reduce both income tax AND SE tax (for SEP-IRA).
- Track every business expense with an app like MileIQ (mileage) or QuickBooks (general). The IRS requires contemporaneous records.
- Set aside 30-40% of every payment for taxes — open a separate savings account just for this.
- Consider S-Corp election (Form 2553) once net profit exceeds ~$80,000. The SE tax savings typically outweigh the extra accounting costs.
- Deduct health insurance premiums above-the-line (no itemizing required) — a major benefit for self-employed individuals without employer coverage.
Results are estimates for educational purposes only and not financial advice. Consult a licensed professional for advice specific to your situation.