Self-employment tax: What it is and how to calculate it

Unlike traditional employees, self-employed individuals don’t split payroll taxes with their employer. Freelancers, independent contractors, and small business owners in the U.S. are responsible for paying self-employment tax, which covers all of their Social Security and Medicare contributions.

In this article, learn what self-employment tax is, who has to pay it, and how to calculate it with a step-by-step guide, so you can file taxes with the Internal Revenue Service (IRS) confidently and compliantly. 

What is self-employment tax?

Self-employment tax is the federal tax in the United States that covers Social Security and Medicare contributions for people who work for themselves. The current self-employment tax rate is 15.3%—12.4% for Social Security and 2.9% for Medicare.

Traditional employees split these costs with their employers. The IRS requires the self-employed to pay the entire amount. However, to ease the burden, self-employed workers can deduct 7.65%—half of the employer equivalent of the tax—from their gross income.

When it comes to self-employment tax versus income tax, self-employed workers still pay federal income tax based on the IRS’s marginal rates. The IRS levies these taxes on net income after deductions and expenses. Self-employment tax is separate and specifically funds Social Security and Medicare.

Who has to pay self-employment tax?

Anyone who earns $400 or more in net self-employment income (after business expense deductions) generally must pay self-employment tax.

This includes: 

• Sole proprietors who run their own business
• Independent contractors or freelancers
• Partners in partnerships who share profits
• People with income sources that come from side hustles or other types of self-employed work
• Members of a limited liability company (LLC), if they structure it like a partnership for tax purposes. LLCs that structure themselves as S corporations may draw salaries from the business (subject to payroll tax) and distribute excess profits in a way that doesn’t trigger self-employment tax.

There are a few exceptions, including clergymen, some notaries public, and U.S. citizens or resident aliens living in a country in a Social Security agreement with the U.S. Otherwise, if you work and an employer doesn’t withhold payroll taxes on your behalf, you’ll have to pay self-employment tax.

How to calculate self-employment tax

You can use the IRS’s Schedule SE form to calculate self-employment tax—here’s a step-by-step look at the math:

1. Determine your net earnings: Take your self-employment income and subtract allowable business expenses. Now, you have your net earnings, which is what the IRS uses to calculate self-employment tax.
2. Calculate your adjusted base earnings: Because the IRS lets you exclude 7.65% of your self-employment income to account for the typical employer portion of Social Security and Medicare, multiply your net earnings by 92.35% (100% minus 7.65%) to arrive at your adjusted base.
3. Calculate the Social Security tax: Multiply your adjusted base by 12.4% to cover your Social Security contribution. As of 2025, self-employed individuals only pay Social Security tax on up to $176,100 in income. 
4. Calculate the Medicare tax: Multiply your adjusted base by 2.9% for your Medicare contribution. There’s no cap on Medicare. In fact, making above $200,000 for single and $250,000 for married filing jointly taxpayers means owing excess Medicare tax of 0.9%. 
5. Add Social Security and Medicare taxes: The sum of your Social Security and Medicare contributions equals your self-employment tax. Report this amount and pay it—in addition to federal income tax due—with your IRS return. 

How to pay self-employment taxes

Self-employed workers should follow these steps throughout the year to ensure they remain on top of paying self-employment tax:

1. Estimate your taxes: Use IRS Form 1040-ES to estimate your income tax and self-employment tax for the full year. To reduce your tax due, the IRS allows the self-employed to deduct 50% of their self-employment tax when calculating adjusted gross income (AGI). This self-employment tax deduction doesn’t reduce the tax itself, but it reduces your AGI and, subsequently, your tax bill.
2. Make quarterly estimated tax payments: Submit required estimated tax payments by January 15, April 15, June 15, and September 15. You can pay the IRS directly online or use Form 1040-ES vouchers to mail a check. 
3. File annually: File your year-end tax return. Include Schedule SE alongside your federal income tax due data and calculations. 

By managing this process throughout the year, you’ll minimize your chance of receiving IRS underpayment penalties. If you don’t make your estimated tax payments, then you’ll likely be hit with an outsized tax bill when you file your year-end return.

Hire freelancers and contractors with Oyster

As an employer, it’s important to know what is (and isn’t) your tax burden for different kinds of workers, such as employees and contractors.

But taxes aren’t the only thing to consider when you want to expand your team. People who are self-employed often have a specialized skillset, like editing or bookkeeping, and can step in to support teams in critical moments. If you want to add a freelancer, contractor, or other self-employed worker to your team, Oyster makes it easy to onboard contractor talent in the U.S. and 180+ countries around the world. 

Oyster helps businesses stay compliant when hiring and paying independent contractors worldwide. From generating contracts that meet local laws to streamlined onboarding processes, working with Oyster makes working with global contractors easier than ever. 

Start saving time and build your dream team with Oyster.

FAQ

Which jobs are exempt from self-employment tax?

While most self-employed workers in the U.S. must pay the self-employment tax, there are a few exceptions. These include clergy members, some notaries public, and foreign government employees. If you’re a U.S. citizen or resident alien living outside of the U.S., you must file an income tax return and, if self-employed, pay the self-employment tax. However, the U.S. has Social Security agreements with many countries to prevent double taxation of the same earnings. If you pay Social Security in another country with an agreement with the U.S., you might be exempt from paying self-employment tax.

What is the difference between self-employment tax and income tax?

Self-employment tax specifically covers your Social Security and Medicare contributions, as they’re part of standard payroll taxes. In a traditional office setting, employers pay an equivalent to self-employment tax to the U.S. federal government out of the employee’s regular paycheck. These taxes are flat, as opposed to income tax, which is progressive based on your income. Income tax covers your overall taxable income, but is separate from self-employment tax. Self-employed workers must pay both income and self-employment taxes.

What deductions are available for self-employment tax?

In addition to the deduction allowing you to cut 50% of your self-employment tax from your AGI, you can reduce your taxable income by deducting business expenses, use of home offices, and, in some cases, health insurance premiums.

About Oyster

Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.