Understanding Self-Employment Tax: What Every Freelancer Should Know

What Is Self-Employment Tax?

Self-employment (SE) tax is the Social Security and Medicare tax for individuals who work for themselves. When you’re an employee, your employer pays half of these taxes and withholds the other half from your paycheck. When you’re self-employed, you pay both halves.

The current self-employment tax rate is 15.3%, consisting of:

12.4% for Social Security (on net earnings up to $176,100 for 2025)
2.9% for Medicare (on all net earnings, no cap)
0.9% Additional Medicare Tax (on net earnings over $200,000 for single filers)

Who Pays SE Tax?

You must pay SE tax if your net self-employment earnings are $400 or more per year. This includes:

Freelancers and independent contractors (1099-NEC recipients)
Sole proprietors
General partners in a partnership
Members of an LLC taxed as a sole proprietorship or partnership
Gig economy workers (rideshare drivers, delivery workers, etc.)

How It’s Calculated

Start with your net self-employment income (gross income minus business expenses from Schedule C)
Multiply by 92.35% (0.9235) — this adjustment accounts for the employer-equivalent portion
Apply the 15.3% tax rate to the result

Example: $100,000 net self-employment income × 0.9235 = $92,350 × 15.3% = $14,130 in SE tax

Deductions That Help

Deductible Half of SE Tax

You can deduct 50% of your SE tax as an adjustment to income on your Form 1040 (line 15). This reduces your adjusted gross income but not your SE tax itself.

Health Insurance Deduction

Self-employed individuals can deduct 100% of health insurance premiums (medical, dental, vision) for themselves, their spouse, and dependents as an above-the-line deduction.

Retirement Contributions

Contributing to a retirement plan can significantly reduce your taxable income:

SEP-IRA: Up to 25% of net self-employment earnings (max $70,000 for 2025)
Solo 401(k): Employee contributions up to $23,500 plus employer contributions up to 25% of earnings
SIMPLE IRA: Employee contributions up to $16,500

S-Corp Election Strategy

Once your self-employment income reaches a certain level, electing S-Corp taxation can reduce SE tax. As an S-Corp owner, you pay yourself a “reasonable salary” (subject to payroll taxes) and take the remaining profit as distributions (not subject to SE tax).

Important: The salary must be reasonable for your industry and role. The IRS scrutinizes S-Corp owners who pay themselves artificially low salaries.

Understanding SE tax is essential for proper tax planning and avoiding underpayment penalties. Quarterly estimated payments should account for both income tax and SE tax.