Overview
Self-employment tax covers Social Security and Medicare taxes for individuals who work for themselves. Unlike traditional employees, self-employed individuals must pay both the employer and employee portions of these taxes.
2025 Self-Employment Tax Rates
- Total Rate: 15.3% (12.4% for Social Security + 2.9% for Medicare)
- Social Security Tax Cap: Applies to earnings up to $168,600.
- Additional Medicare Tax: 0.9% on earnings above:
- $250,000 (Married filing jointly)
- $200,000 (Single, Head of Household)
- $125,000 (Married filing separately).
Who Must Pay Self-Employment Tax?
- Freelancers, independent contractors, gig workers, and small business owners.
- Individuals earning $400 or more in net self-employment income.
- Church employees earning $108.28 or more.
How to Calculate Self-Employment Tax
- Determine Net Earnings: Subtract business expenses from total income.
- Apply Tax Rate: Multiply net earnings by 15.3%.
- Deduct Employer Portion: You can deduct half of the self-employment tax when calculating adjusted gross income.
Tax Deductions for Self-Employed Individuals
- Home Office Deduction: If used exclusively for business.
- Health Insurance Deduction: Covers premiums for self-employed individuals.
- Business Expenses: Includes equipment, software, and advertising costs.
- Retirement Contributions: SEP IRA, Solo 401(k), and other tax-advantaged accounts.
Common Pitfalls & How to Avoid Them
- Failing to Set Aside Taxes: Make estimated quarterly payments to avoid penalties.
- Overlooking Deductions: Keep detailed records of business expenses.
- Ignoring Additional Medicare Tax: Plan for extra taxes if earnings exceed thresholds.
Tools & Resources
- IRS Self-Employment Tax Guide for official tax rules.
- Self-Employment Tax Calculator to estimate liabilities.
- Tax Planning Strategies for reducing taxable income.