Self-Employment Tax

Self-employment tax is the Social Security and Medicare tax paid by people who work for themselves rather than for an employer. When someone earns a wage, the employer withholds the employee share of Social Security and Medicare tax and pays a matching employer share. A self-employed person has no employer, so they cover both halves directly. The IRS describes this on its Self-Employment Tax page, which states that the tax is “a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves.”

The Rate and Its Split

According to the IRS, “the self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).”

The two parts behave differently:

• Social Security, 12.4 percent. This part applies only to net earnings up to the annual Social Security wage base. The wage base is set by the Social Security Administration and changes most years, so earnings above that ceiling are not subject to the Social Security part. Per the IRS, “for earnings in 2026, this base limit is $184,500” (Topic No. 751). The IRS notes that the same combined wage and self-employment earnings cap applies across the Social Security part of self-employment tax, the Social Security tax on wages, and railroad retirement tier 1 tax.
• Medicare, 2.9 percent. This part has no income cap. It applies to all net earnings from self-employment, no matter how high.

Who Pays It and on What

The IRS generally requires you to file Schedule SE and pay self-employment tax if your net earnings from self-employment were 400 dollars or more. This covers sole proprietors, independent contractors, and general partners. Self-employment tax is figured on net earnings, which is your business income after deductible business expenses, not on gross receipts.

The tax is calculated on Schedule SE, which attaches to Form 1040 or Form 1040-SR. A common-law employee, by contrast, is not subject to self-employment tax on that work, because the employer already withholds and matches Social Security and Medicare tax on wages. Worker classification therefore decides which side of this line a person falls on.

The One-Half Deduction

The IRS allows a self-employed person to deduct the employer-equivalent portion of self-employment tax, equal to one half of the tax, when figuring adjusted gross income. This mirrors the fact that an employer’s share of payroll tax is a business expense. The deduction reduces income tax. It does not reduce the self-employment tax itself.

Paying Through the Year

Because no employer withholds Social Security, Medicare, or income tax from a self-employed person, the IRS expects the tax to be paid as income is earned, usually through quarterly estimated tax payments rather than a single year-end payment.

Common Pitfalls

• Forgetting it exists. New contractors often plan only for income tax and are surprised by the additional 15.3 percent on net earnings.
• Calculating on gross, not net. Self-employment tax applies to net earnings after business expenses, not to total revenue.
• Missing the wage base limit. The Social Security part stops at the annual wage base, but the Medicare part keeps applying to all earnings.

Related Terms

• Common-Law Employee: a worker who is not subject to self-employment tax because the employer withholds payroll tax.

Omnivoo classifies each worker correctly at onboarding and produces the tax records a US payer needs, so the line between an employee and a self-employed contractor is documented from the start.