Employees have Social Security and Medicare taxes withheld from their pay, and their employer pays a matching share. When you work for yourself, there is no employer to split the cost with. Instead, you generally pay these taxes yourself through self-employment tax.

What the IRS says

The IRS explains on its self-employment tax page that self-employment tax is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves. The page notes that references to self-employment tax refer to Social Security and Medicare taxes only, and do not include other taxes that self-employed individuals may need to pay. You calculate it using Schedule SE, filed with Form 1040.

The same page sets out who must pay, including a minimum level of net earnings from self-employment, and lists current rates and wage-base limits. Those figures are set in law and adjusted over time, so check the IRS page for the current year rather than relying on a number from an old article.

Who it usually applies to

  • Sole proprietors and single-member LLCs taxed as sole proprietorships
  • General partners in a partnership, on their share of partnership earnings
  • Independent contractors and freelancers

Owners of S corporations are generally treated differently: owners who work in the business usually receive wages through payroll, with Social Security and Medicare handled there. The IRS explains S corporations on its S corporations page; structure decisions should be made with a tax adviser.

Net earnings, not revenue

Self-employment tax is based on net earnings from self-employment, which broadly means business income minus allowable business expenses. That is why complete, well-supported bookkeeping matters: an expense that is never recorded increases the profit that the tax is calculated on, and an expense without support may not be allowed.

Paying during the year

There is no withholding on self-employment income, so many self-employed people make quarterly estimated payments that cover both income tax and self-employment tax. Our guide to estimated tax payments explains how they work, and the IRS covers them on its estimated taxes page.

Bookkeeping that helps

  • Record every business expense with a receipt
  • Keep business and personal spending in separate accounts
  • Review profit quarterly, so estimated payments reflect actual results
  • Keep mileage and home office records if you claim them

A worked approach rather than a worked example

Because rates and thresholds change, we do not publish sample calculations. Instead, each quarter we give clients an up-to-date profit figure from reconciled books, which they or their preparer can use with the current IRS rules.

Key terms

  • Net earnings from self-employment: broadly, self-employment income minus allowable business expenses, as defined in the IRS rules.
  • Schedule SE: the form used with Form 1040 to calculate self-employment tax.
  • Estimated tax: payments made during the year when tax is not withheld from income.
  • Wage base: the maximum amount of earnings subject to the Social Security part of the tax for a year, published by the IRS.
  • Sole proprietor: someone who owns an unincorporated business by themselves.

Knowing these terms makes conversations with your tax preparer quicker and helps you read the IRS pages linked above.

How we help

Our bookkeeping services keep profit figures current, and our tax services prepare the year-end package for your preparer.