What is Self-Employment Tax and How Does it Impact Your Business?

Working for yourself can be very rewarding. You get the freedom and the opportunity to bring your vision to life, but you also have to stay compliant with increasingly complex tax regulations. One tax that sneaks up on many small business owners is the self-employment tax.

We've created this self-employment tax guide to get you on the right track. It explains self-employment tax rates and returns, helping you determine if you owe it and how to manage it.

What is Self-Employment Tax?

The self-employment tax is the business owner’s version of Social Security and Medicare payroll taxes. In a traditional working relationship, the employer automatically withholds these taxes from the paycheck and matches the amount on their end. As a self-employed person, you’re responsible for both halves. You’re required to pay the self-employment tax if you earn $400 or more in net earnings from freelance work or operating your own business.

Who Needs to Pay Self-Employment Tax?

The guidelines around self-employment can be difficult to understand. Here’s how to check:

• Look at Your Net Earnings: Subtract your deductible business expenses from your gross income to calculate your net earnings. If the result is $400 or more, you’ll have to pay the self-employment tax.

• Check Your Business Structure: Sole proprietors and independent contractors need to pay self-employment tax on their net earnings. General partners are also subject to paying. 

• Consider all Income Streams: Having a full-time W-2 job doesn’t exempt you from self-employment tax on your side business. You’re still obligated to pay the tax on earnings over $400 that you make on the side.

Understanding how these rules apply helps mitigate surprises when it’s time to file your self-employment tax return.

Self-Employment Tax Rates and Calculations

As of 2025, the self-employment tax rate is 15.3%, and it’s applied to 92.35% of your net earnings. The self-employment tax consists of two parts:

1. 12.4% for Social Security (on the first $168,600 of net earnings as of 2024)

2. 2.9% for Medicare (with no income cap)

If your net earnings exceed $200,000 as a single filer or $250,000 if you’re married filing jointly, you’re also responsible for an additional 0.9% Medicare surtax.

To figure out how much you owe in self-employment taxes, let’s use an example. You just learned how to pay yourself from your Limited Liability Company (LLC), and now you’re ready to tackle your self-employment taxes. For this year, your gross income is $80,000, and your business expenses are $12,000.

To get your net earnings, you’ll subtract your business expenses from your gross income, which brings you to $68,000. That’s below $168,600, so the full amount will be taxed. Since the self-employment tax is only applied to 92.35% of net earnings, you have to multiply your net earnings by that percentage.

• Calculation: $68,000 x 0.9235 = $62,798

That is the amount of your taxable earnings. To determine your Social Security portion, multiply $62,798 by 12.4%.

• Calculation: $62,798 x 0.124 = $7,786.95

To find out how much you owe for the Medicare portion, you’ll multiply the taxable earnings of $62,798 by 2.9%.

• Calculation: $62,798 x 0.029 = $1,821.14

Add the Social Security and Medicare portions together, and you’ll see the amount of self-employment taxes that you owe.

• Calculation: $7,786.95 + $1,821.14 = $9,608.09

According to your calculations in this example, you owe $9,608.09 in self-employment taxes for the year.

Reporting and Filing Self-Employment Tax

Filing self-employment taxes gets easier with organization. You can stay on top of the IRS requirements by knowing which forms to use and when to file. Here’s what the process may look like:

1. Calculate Net Earnings

Before reporting anything, you need to know your net earnings. You can pull this figure from your profit and loss statement, as it compiles your income and expenses over a period of time.

2. File Quarterly Estimated Taxes

Use Form 1040 Schedule SE to report your self-employment taxes. You’ll also use Form 1040-ES to submit your estimated payments for every quarter by these due dates: 

• April 15 (for money earned January 1 to March 31)

• June 15 (for money earned April 1 to May 31)

• September 15 (for money earned June 1 to August 31)

• January 15 of the following year (for money earned September 1 to December 31)

3. File the Annual Return

Even if you’re making quarterly payments, you’ll still need to file Form 1040 at tax time. It's where you officially report all your income and the taxes you paid. 

4. Keep Thorough Records

Maintain supporting documents, such as receipts and invoices, to back up your self-employment tax return. You also want to keep up with your employee and payroll tax records.

Go to the IRS website to access your federal tax account. You can review your information and apply for a payment plan if necessary.

Myths and Misconceptions About Self-Employment Tax

Since self-employment taxes aren’t as straightforward as a W-2 paycheck, they’re often misunderstood. Common misconceptions include:

• No Profit, No Filing: This isn’t necessarily correct. You may not owe any self-employment taxes if you didn’t make at least $400 that year, but you still have to file a self-employment tax return. You're required to report your income and expenses.

• Making a Yearly Payment Only: The IRS expects quarterly estimated payments. Waiting until April can result in penalties and interest.

• Business Structure Confusion: Thinking that an LLC will absolve you from owing the self-employment tax is a misconception. An LLC is a legal structure, not a tax strategy. Unless you form an S-corporation for taxation, your LLC income is still subject to self-employment tax. 

It's always a good idea to work with a tax professional if your situation requires it. They can ensure you file all the necessary small-business taxes.

How Justworks Streamlines Self-Employment Tax Management

Whether you're working for yourself or growing your team, tax and compliance management can become a full-time job in itself. The right tools can help you stay on top of your taxes. Justworks offers modern payroll software to simplify payments and HR tasks. This efficiency gives you more room to focus on running the business you set out to build. Get started with Justworks today.