What Is Self-Employment Tax? How It Works and How to Reduce It

When you work for an employer, you pay 7.65% for Social Security and Medicare — and your employer pays the other 7.65%. When you're self-employed, you pay both halves: 15.3%. That's the self-employment tax, and it catches many freelancers and business owners off guard.

How Self-Employment Tax Is Calculated

Self-employment tax applies to 92.35% of your net self-employment income (the IRS lets you exclude the equivalent of the employer half before calculating). The rate breaks down as:

• 12.4% Social Security on net earnings up to $176,100 (2025 limit)
• 2.9% Medicare on all net earnings — no cap
• 0.9% Additional Medicare Tax on earnings above $200,000 (single) or $250,000 (married)

Example: $80,000 in freelance income → $80,000 × 0.9235 = $73,880 taxable SE income → $73,880 × 15.3% = $11,304 in self-employment tax.

SE Tax vs Income Tax: What's the Difference?

Self-employment tax and income tax are separate. SE tax covers Social Security and Medicare. Income tax is calculated on your total income and is affected by deductions, credits, and your tax bracket. You owe both — but you can reduce both.

How to Legally Reduce Self-Employment Tax

• Deduct half of SE tax from gross income (the IRS allows this automatically)
• Contribute to a SEP-IRA or Solo 401k — contributions reduce taxable income dollar for dollar
• Deduct legitimate business expenses (home office, equipment, software, health insurance premiums)
• S-Corp election: paying yourself a 'reasonable salary' and taking remaining profit as distributions can reduce SE tax on the distribution portion

Quarterly Estimated Taxes: Don't Get Caught Short

Self-employed workers don't have withholding, so you must pay estimated taxes quarterly (April, June, September, January). If you underpay by more than $1,000, the IRS charges an underpayment penalty. A simple rule: set aside 25–30% of every payment you receive for taxes.