When you work for an employer, Social Security and Medicare taxes are split between you and your employer - you pay half, they pay half, and it all happens automatically through payroll. When you are self-employed, there is no employer to share the cost. You pay both halves yourself. That is what self-employment tax is.
Here is a plain-English explanation of how it works, what you owe, and how it differs from being a W-2 employee.
What Is Self-Employment Tax?
Self-employment tax covers two programs: Social Security and Medicare. For 2026, the combined rate is 15.3 percent, broken down as:
- 12.4 percent for Social Security (applies to the first 184,500 dollars of net self-employment income)
- 2.9 percent for Medicare (applies to all net self-employment income, no cap)
This applies to anyone with net self-employment earnings of 400 dollars or more in a year - sole proprietors, freelancers, independent contractors, and partners in a business.
How Is It Different From a W-2 Job?
As a W-2 employee, your employer withholds 7.65 percent from your paycheck (your share of Social Security and Medicare) and matches it with another 7.65 percent of their own. You never see that employer half - it goes directly to the IRS.
As a self-employed person, you pay both halves: the full 15.3 percent. The trade-off is that you can deduct half of your self-employment tax when calculating your adjusted gross income on your federal return. This reduces your income tax, though it does not reduce the self-employment tax itself.
What Does Self-Employment Tax Apply To?
It applies to your net self-employment earnings - that is, your revenue minus your allowable business expenses. You do not pay self-employment tax on gross revenue; you pay it on what is left after deducting legitimate business costs.
There is also a calculation adjustment: technically, self-employment tax is calculated on 92.35 percent of your net earnings, which accounts for the fact that employees get an equivalent benefit through their employer's matching contribution.
Is Self-Employment Tax the Same as Income Tax?
No, and this trips up many first-time self-employed people. Self-employment tax and income tax are separate obligations. You pay both.
Self-employment tax funds Social Security and Medicare. Income tax is calculated separately based on your total taxable income. When you file your annual return, you calculate both and pay whatever is owed beyond any estimated payments you have already made during the year.
How Are Self-Employment Taxes Actually Paid?
Unlike employees who have taxes withheld from each paycheck, self-employed people are responsible for paying taxes throughout the year via estimated quarterly payments. If you expect to owe 1,000 dollars or more in taxes for the year, the IRS generally requires you to make these payments. Missing them can result in a penalty at tax time.
See our article on estimated quarterly taxes for a full explanation of how to calculate and when to pay.
What Records Do You Need?
You will need to track your income and business expenses throughout the year. At tax time, you will file Schedule C (profit or loss from business) and Schedule SE (self-employment tax) along with your Form 1040. Many self-employed people use simple bookkeeping software or a spreadsheet to stay organized.
Where to Learn More
- IRS - Self-Employment Tax - irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes The IRS overview of how self-employment tax works, including rates and how to calculate what you owe.
- IRS - Self-Employed Tax Center - irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center A central resource for all tax topics relevant to self-employed individuals.
- IRS - Schedule SE - irs.gov/forms-pubs/about-schedule-se-form-1040 The form used to calculate self-employment tax, with instructions.
Disclaimer: This article provides general information for educational purposes only and does not constitute tax or financial advice. Tax rates and thresholds change annually - confirm current figures at irs.gov or consult a CPA before filing.