Self-Employment Tax Basics for Freelancers and Contractors

When you're an employee, your employer withholds Social Security and Medicare tax from your paycheck and pays a matching amount on your behalf. When you're self-employed, there's no employer to split that with — you're responsible for both halves, called self-employment tax.

What the rate actually covers

Self-employment tax is 15.3% of your net self-employment earnings: 12.4% for Social Security and 2.9% for Medicare. This is separate from, and in addition to, your regular income tax.

The deduction most people miss

You can deduct half of your self-employment tax when calculating your adjusted gross income — this is meant to roughly mirror how an employer's half of payroll tax isn't taxed to the employee. It's an "above the line" deduction, meaning you get it even if you don't itemize.

Quarterly estimated payments

Because no one is withholding tax from self-employment income throughout the year, the IRS generally expects it to be paid as you earn it, through quarterly estimated tax payments, rather than all at once when you file. Underpaying throughout the year can result in an underpayment penalty even if you pay the full balance by the filing deadline.

What actually reduces the bill

Ordinary and necessary business expenses reduce your net self-employment earnings, which reduces both your income tax and your self-employment tax. Keeping organized records of business expenses throughout the year — not reconstructed in April — is the single biggest factor in an accurate, defensible return.

Not sure if you're on track with estimated payments, or what actually counts as a deductible expense in your situation? Let's look at your specific numbers.