Self-Employment Tax: Complete Guide for Freelancers

What Is Self-Employment Tax and Why Does It Exist

Self-employment tax is the Social Security and Medicare tax that self-employed individuals pay on their net earnings. When you work as an employee, your employer splits these taxes with you, each paying 7.65%. As a freelancer, you pay both halves, totaling 15.3%.

This tax exists because the Social Security and Medicare systems are funded through payroll contributions. Since freelancers have no employer to share the cost, the full burden falls on them. Understanding how this works is essential to managing your finances as a self-employed professional.

How Self-Employment Tax Is Calculated

The calculation follows a specific formula that many freelancers find confusing at first.

Step 1: Determine Net Self-Employment Income

Start with your gross freelance income and subtract all legitimate business deductions: home office costs, software subscriptions, professional development, marketing expenses, contractor payments, and more. The result is your net profit, reported on Schedule C.

Step 2: Apply the 92.35% Factor

The IRS reduces your net income by 7.65% before calculating SE tax. This adjustment accounts for the fact that employers do not pay FICA on their matching contribution. So you multiply your net profit by 0.9235.

Step 3: Calculate the Tax

On the adjusted amount:

Social Security: 12.4% on income up to $176,100 (2025 wage base)

Medicare: 2.9% on all income with no cap

Additional Medicare: 0.9% on income above $200,000 (single) or $250,000 (married filing jointly)

Example Calculation

A freelance designer earns $95,000 in gross income and has $15,000 in deductible expenses.

Net profit: $80,000

Adjusted for SE: $80,000 x 0.9235 = $73,880

Social Security: $73,880 x 12.4% = $9,161

Medicare: $73,880 x 2.9% = $2,143

Total SE tax: $11,304

This is on top of federal and state income tax. The freelancer can then deduct half of the SE tax ($5,652) as an above-the-line deduction, reducing their adjusted gross income.

Who Must Pay Self-Employment Tax

You owe SE tax if your net self-employment earnings are $400 or more in a tax year. This includes income from:

Freelance or consulting work (1099-NEC income)

Gig economy platforms like Uber, DoorDash, Fiverr, or Upwork

Selling goods through Etsy, eBay, or your own website

Rental income if you provide substantial services to tenants

Partnership income from a general partnership

Income from passive investments, rental properties (without substantial services), and S-Corp distributions is generally not subject to SE tax.

Quarterly Estimated Payments

The IRS expects you to pay taxes as you earn income, not in one lump sum at year end. If you expect to owe $1,000 or more, make quarterly estimated payments:

Q1 (Jan-Mar): Due April 15

Q2 (Apr-May): Due June 16

Q3 (Jun-Aug): Due September 15

Q4 (Sep-Dec): Due January 15

Safe Harbor Strategy

Pay at least 100% of last year's total tax liability (110% if your AGI exceeded $150,000) divided into four equal payments. This guarantees no underpayment penalty regardless of how much your income grows.

Cash Flow Management

Set aside 25-30% of every payment you receive in a dedicated tax savings account. This prevents the common freelancer trap of spending all your income and scrambling to cover a tax bill in April.

Seven Strategies to Reduce Self-Employment Tax

1. Deduct Every Legitimate Business Expense

Every dollar of business expense reduces your SE tax by about 14 cents (15.3% x 92.35%). Common deductions freelancers miss include professional liability insurance, continuing education, coworking space memberships, and the business portion of internet and phone bills. Use our freelance tax calculator to model the impact.

2. Claim the Home Office Deduction

If you have a dedicated workspace in your home, claim the home office deduction. The simplified method provides $5 per square foot up to $1,500. The regular method can yield significantly more if your housing costs are high.

3. Contribute to Retirement Accounts

SEP IRA contributions (up to 25% of net self-employment income, max $70,000) and Solo 401(k) contributions reduce your taxable income. While they do not directly reduce SE tax (which is calculated before retirement deductions), they dramatically reduce your income tax.

4. Consider S-Corp Election

If your net profit consistently exceeds $50,000-$80,000, electing S-Corp taxation can produce meaningful SE tax savings. As an S-Corp, you pay yourself a reasonable salary (subject to payroll tax) and take remaining profits as distributions (not subject to SE tax).

For example, if your business nets $120,000, instead of paying SE tax on the full amount, you might pay yourself a $70,000 salary (with $10,710 in payroll taxes) and take $50,000 as distributions. The savings: approximately $4,600 per year.

5. Hire Your Spouse

If your spouse helps with your business, paying them a reasonable salary shifts income that is subject to SE tax on your return to employment wages on their W-2. While payroll taxes still apply, this strategy can provide other benefits like spousal IRA contributions and access to employer health plans.

6. Time Your Income and Expenses

If your income fluctuates, timing matters. Accelerate expenses into high-income years (prepay subscriptions, buy equipment) and defer income when possible. This keeps more of your earnings in lower brackets and below the Additional Medicare Tax threshold.

7. Use the QBI Deduction

The Qualified Business Income deduction allows eligible freelancers to deduct 20% of qualified business income. While this reduces income tax rather than SE tax, it effectively lowers your overall tax rate on self-employment earnings. Income thresholds apply for service businesses.

Common Mistakes Freelancers Make

Not separating business and personal finances: Mixing accounts makes expense tracking unreliable and raises audit red flags.

Forgetting about SE tax when pricing services: If you charge $100 per hour, roughly $15.30 goes to SE tax before income tax. Factor this into your rates.

Ignoring quarterly payments: Underpayment penalties add up. Set calendar reminders for all four due dates.

Missing the self-employment tax deduction: Half of your SE tax is deductible on your Form 1040. This above-the-line deduction reduces your AGI and your income tax.

Not tracking mileage: Business mileage at 70 cents per mile adds up quickly. A freelancer driving 10,000 business miles per year can deduct $7,000.

Tools to Help You Stay on Track

Taxation.ai automates SE tax calculations, tracks estimated payments, categorizes expenses with AI, and projects your quarterly tax obligations in real time. Connect your bank accounts and invoicing platform to get a live view of your tax situation throughout the year, not just at filing time.