Self-Employment Tax
Social Security and Medicare taxes paid by self-employed individuals.
Self-employment tax is the combined Social Security (12.4%) and Medicare (2.9%) tax that self-employed individuals pay on net earnings. It covers both the employer and employee portions of FICA. Half of self-employment tax is deductible as an above-the-line adjustment to income. The tax applies to net self-employment earnings over $400.
Formula
Self-Employment Tax ≈ 15.3% × (Net Self-Employment Income × 92.35%)Example
A freelancer with $80,000 in net self-employment income pays approximately $11,300 in self-employment tax (15.3% of 92.35% of net earnings).
Why It Matters for Your Business
Self-employment tax is often a shock to new freelancers because it's 15.3% on top of income tax—planning for it prevents cash flow surprises.
Related Terms
More Taxes Terms
Adjusted Gross Income
Gross income minus specific deductions like retirement contributions.
Tax Audit
An examination of tax returns by the IRS to verify accuracy.
Capital Gains
Profit from selling an asset for more than its purchase price.
Capital Loss
Loss from selling an asset for less than its purchase price.
Tax Deduction
An expense that reduces taxable income.
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