Self-Employment Tax Explained: How It Works and How to Figure Out What You Owe

If you’ve stepped away from a steady paycheck to work for yourself, you’ve probably felt that mix of pride and “okay…what now?” One spot that trips people up is the self-employment tax. Think of it as the Social Security and Medicare piece that employees pay automatically from their paychecks—except when you’re solo, you cover both sides. That twist often surprises even the most organized freelancer. Nakase Law Firm Inc. often hears from freelancers and small business owners who ask, what is self-employment tax and how is it calculated?, because the rules aren’t always straightforward when you’re juggling both the “employee” and “employer” roles.

Let’s set the scene. With a traditional job, taxes slip out of your pay before you ever see the money. With self-employment, no one’s doing that for you—so the details matter. California Business Lawyer & Corporate Lawyer Inc. frequently explains what is FICA and how does it impact payroll taxes? to clients who are new to working for themselves, since understanding FICA is the first step to seeing how self-employment tax fits into the bigger picture. Once that clicks, the rest of the process starts to feel manageable.

Breaking Down Self-Employment Tax

So what is it, in plain terms? It’s the IRS’s way of making sure independent workers contribute to Social Security and Medicare like everyone else. Employees have it withheld; solo workers make it happen on their own. The combined rate is 15.3 percent: 12.4 percent for Social Security and 2.9 percent for Medicare. If your income rises above certain thresholds—say, $200,000 for a single filer or $250,000 if married filing jointly—there’s an additional 0.9 percent Medicare tax on the amount over that line. Simple enough on paper, though it can feel heavier when you’re the one writing the checks.

Who Pays It?

Here’s the quick rule: if your net self-employment earnings reach $400 or more for the year, you owe it. That covers a lot of real-life scenarios. Maybe you sell custom cakes from your kitchen on weekends. Maybe you drive for a rideshare app a few evenings a week. Maybe you run a small design studio from your spare room. If the total net income crosses that threshold, this tax applies. And yes, side hustles count.

A small story helps: Leo, a photographer, picked up a handful of wedding gigs one summer. He cleared close to $6,000 after buying new lenses and paying for editing software. He didn’t think of himself as a “business,” yet the tax rules treated him that way. Once he set aside money as payments came in, the stress dropped fast.

How to Calculate Self-Employment Tax

Okay, let’s walk through the math with a little handholding:

1. Start with net earnings. That’s your total revenue minus business expenses like supplies, software, mileage, and gear.
2. Multiply those net earnings by 92.35 percent. That’s an IRS adjustment because, in a regular job, an employer would chip in.
3. Take the adjusted number and multiply by 15.3 percent.
4. If your income exceeds the extra Medicare threshold, add 0.9 percent to the portion above it.

Here’s a clean example. Say your net income is $80,000. Multiply by 92.35 percent to get about $73,880. Now multiply by 15.3 percent. That lands you near $11,305 for self-employment tax. Not tiny—so building a habit of setting cash aside each month can make a real difference when deadlines roll in.

The Hidden Silver Lining: Deductions

There’s a built-in break most people miss the first time around. You can deduct half of your self-employment tax when figuring your adjusted gross income. It doesn’t erase what you owe on the self-employment side, though it lowers taxable income for your income tax. If your self-employment tax works out to $11,305, that means roughly $5,652 reduces your taxable income. It’s the system’s way of acknowledging you’re wearing two hats.

Self-Employment Tax vs. Income Tax

People often blend these together in their mind, which leads to confusion. They’re separate. One handles Social Security and Medicare contributions. The other is your regular income tax based on your total taxable income, filing status, and credits. You pay both. That’s why new business owners sometimes feel blindsided: they planned for income tax, but not the Social Security/Medicare piece sitting beside it.

Why Quarterly Payments Matter

Here’s where rhythm helps. Because no employer is withholding for you, the IRS expects estimated payments four times a year—April, June, September, and January. Skip those and you may face penalties plus interest. A steadier approach: treat every client payment as if it already carries a tax portion. Many people transfer 25–30 percent of each payment to a separate savings account the moment the money hits. That way, when a deadline appears, the funds are already parked and waiting. Form 1040-ES guides the calculation, and it’s more approachable than you might think once you’ve done it once.

A quick example: Tasha delivers groceries as a side gig. Each Sunday night, she totals the week’s payouts and moves 28 percent into a separate “tax” bucket. By the time quarterly dates arrive, she’s not scrambling—she’s just sending what she already set aside.

Keep Receipts and Track Expenses

Here’s where attention pays off. The IRS taxes your net income, not your gross. So every legitimate business expense you track helps trim the bill. Think home office costs (if you qualify), health insurance premiums you pay for yourself, mileage for client visits, software subscriptions, office supplies, and reasonable travel and business meals.

A quick cautionary tale: Maya runs a cottage bakery. The first year, she tossed receipts into a drawer and sorted them in March. She missed hundreds of dollars in deductible costs just because a few receipts got lost. The next year, she used a simple phone app after each purchase. Ten seconds per expense saved her real money at tax time.

Planning Ahead Saves Stress

A little structure goes a long way. Some self-employed folks create a “paycheck” routine: every Friday, they move a set percentage of that week’s income into the tax account before anything else. Bills get paid from what remains. This simple flow prevents accidental overspending and keeps taxes from turning into an April surprise.

While you’re at it, consider retirement accounts built for solo workers. A SEP IRA or Solo 401(k) can help lower taxable income for your income tax and build a nest egg at the same time. Keep in mind, though, these reduce income tax and not the self-employment portion. Still, your future self will thank you.

A Few Extra Pointers for Newcomers

• New to invoicing? Add a small note to each invoice reminding yourself to move the tax share once it’s paid. That tiny nudge builds the habit.
• Working across multiple platforms or clients? Keep a simple spreadsheet with three columns: date, amount received, amount set aside for taxes. Clear and quick.
• Thinking about big purchases? Time them around your cash flow and quarterly dates so you’re not pinched when payments are due.

Wrapping It Up

Self-employment tax is not a punishment; it’s simply the way solo workers contribute to Social Security and Medicare. Once you see how the pieces fit—rate, thresholds, quarterly payments, and deductions—it stops feeling like a mystery. The trick is to handle it in small, steady steps. Set money aside when payments arrive, track expenses as you go, and touch base with a pro when your situation changes.

Here’s the encouraging part: paying self-employment tax means you’re building credits for future benefits. That’s real value down the road. And if the first year felt messy, that’s common. Most people smooth things out by year two with a better rhythm, a tidier system for receipts, and a tax savings account that’s always a step ahead.

Questions still lingering? That’s normal. Jot them down as they pop up—then sort them during your next bookkeeping session or with an advisor. With a few repeatable habits, the whole process starts to feel like just another part of running your business—steady, predictable, and under control.