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If you earn money from freelancing, gig work, or running a small business, you pay self-employment (SE) tax on top of regular income tax. It catches a lot of first-time 1099 earners by surprise. Here’s how it actually works.
What self-employment tax is
When you’re an employee, your paycheck has Social Security and Medicare withheld, and your employer pays a matching half. When you work for yourself, you’re both the employee and the employer, so you pay both halves. That combined rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare.
What it’s calculated on
SE tax doesn’t apply to your gross revenue, and not even to your full profit. It applies to 92.35% of your net self-employment earnings (your profit after business expenses). The 7.65% reduction roughly mirrors the employer-side deduction a W-2 worker effectively gets.
- Social Security (12.4%) applies up to an annual wage base: $176,100 for 2025. Any W-2 wages you already paid Social Security on reduce the room left under that cap.
- Medicare (2.9%) applies to all of your net earnings, with no cap. Higher earners may owe an additional 0.9% Medicare tax.
The deduction that softens the blow
You can deduct half of your SE tax as an adjustment to income. It doesn’t reduce the SE tax itself, but it lowers the income that your income tax is calculated on.
How to lower what you owe
- Track every legitimate business expense: each dollar of deduction reduces the profit SE tax is based on.
- Consider a retirement plan (SEP-IRA, Solo 401(k)) for self-employed savers.
- Once profit is consistently high, ask whether an S-corporation election could reduce SE tax (it isn’t right for everyone, and the math has to work).
Don’t forget quarterly payments
Because no one is withholding tax for you, the IRS expects quarterly estimated payments. Skipping them leads to an underpayment penalty even if you pay in full by April. See our guide to quarterly estimated taxes, or estimate your SE tax with the Self-Employment Tax Estimator. If you would rather hand it over, we do self-employed tax preparation for Schedule C filers across New Hampshire.
Frequently asked questions
Do I have to pay self-employment tax if I already have a W-2 job?
Yes. Self-employment tax applies to your net self-employment profit regardless of W-2 work, though W-2 wages already taxed for Social Security reduce the Social Security portion of your SE tax up to the annual wage base.
Is self-employment tax the same as income tax?
No. They are separate. SE tax funds Social Security and Medicare; income tax is calculated on your taxable income using the tax brackets. A self-employed person typically owes both.