Paying self-employment tax

If you’re self-employed, you obtain Social Security and Medicare coverage through the payment of self employment tax.

What are self-employment taxes?

Self-employment tax is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners.

How do you determine self-employment taxes?

Self-employment taxes are figured on Schedule SE.

Do you have questions about your self-employment taxes? Check out our Guide to Gig Worker Taxes.

Who must file self-employment taxes?

If your net earnings from self-employment equal $400 or more, you must do both of these:

• File Schedule SE
• Pay self-employment tax

This is true regardless of your age, and even if you’re receiving Social Security benefits.

You’re considered self-employed if you own your own business or the company you work for classifies you as an independent contractor. Because tax is usually not withheld from self-employment income (nonemployee compensation), you’re required to make estimated tax payments during the year to cover your federal income tax and self-employment tax.

What is the self-employment tax rate?

For 2023, the self-employment tax rate is normally 15.3%. The rate is made up of both of these:

• 12.4% Social Security tax
• 2.9% Medicare tax

For 2023, the maximum amount subject to Social Security tax is $118,500. However, all self-employment income in excess of $400 is subject to Medicare tax.

To figure net earnings from self-employment, multiply your net business profit by 92.35%. You use this percentage since an employee is only required to pay one of these:

• 1/2 of Social Security and Medicare taxes
• 7.65% of wage income

A self-employed individual must pay “both halves,” or 15.3%. So, the law equalizes the tax burden by reducing the income subject to tax by 7.65%. Here’s the formula:

100% – 7.65% = 92.35%

You can deduct the employer portion of your self-employment tax as an adjustment to income on Form 1040. The amount you can deduct is usually 1/2 of the employer portion. This decreases your taxable income and, as a result, your federal income tax.

What happens if you don’t pay self-employment tax?

f you don’t pay self-employment tax, you could run into issues. In fact, taxpayers sometimes don’t understand this rule, and end up with a notice from the IRS.

Learn how to address an IRS CP2000 notice.

Get more help

Have a side business?  Take control of your taxes and get every credit and deduction you deserve. File with H&R Block Online Deluxe (if you have no expenses) or H&R Block Online Premium (if you have expenses).

Have questions about self-employment taxes and other small business tax issues? Rely on our team of small business certified tax pros to get your taxes right and keep your business on track. Find out how Block Advisors can help with your small business taxes.

Our small business tax professional certification is awarded by Block Advisors, a part of H&R Block, based upon successful completion of proprietary training. Our Block Advisors small business services are available at participating Block Advisors and H&R Block offices nationwide.