Key ideas

1. The rate is 15.3% of 92.35% of profit. That is 12.4% for Social Security and 2.9% for Medicare, or about 14.1% of net profit for most earners.
2. Profit is income minus business expenses. Every legitimate business cost you deduct on Schedule C lowers both self-employment tax and income tax.
3. Half of it is deductible. You deduct half of your self-employment tax when figuring adjusted gross income. That lowers your income tax, not the self-employment tax itself.

Vocabulary

Self-employment tax

Social Security and Medicare tax for people who work for themselves. It is 15.3% on 92.35% of net profit, on top of income tax.

Schedule C

The IRS form where a self-employed person reports business income and expenses to figure net profit.

Adjusted gross income

Your total income for the year minus a short list of adjustments, like deductible IRA contributions and student loan interest. Many tax rules and programs use it.

Standard deduction

A flat amount the IRS lets you subtract from your income before tax is figured, if you do not itemize deductions.

Tax withholding

Income tax your employer takes out of each paycheck and sends to the IRS for you, as a prepayment of your yearly tax.

Estimated tax payments

Tax you send the IRS yourself during the year, usually in four payments, on income that has no tax withheld, like freelance or gig pay.

Work it out

Leah is a freelance designer. Clients paid her $48,000 this year, and she spent $6,000 on software, a laptop and supplies. She has no other job.

1. Client payments
2. Business expenses
3. Net profit
4. Taxable share (92.35%)
5. Social Security (12.4%)
6. Medicare (2.9%)
7. Self-employment tax
8. Half she can deduct

Check yourself

1. Ana's net self-employment profit is $10,000. What is her self-employment tax?

   • A. $1,530
   • B. $1,413
   • C. $765
   • D. $1,240

2. What does deducting half of self-employment tax lower?

   • A. Your self-employment tax
   • B. Your Social Security wage base
   • C. Your adjusted gross income, and so your income tax

3. At what level of net earnings do you generally owe self-employment tax?

   • A. $400 or more
   • B. Only once a client sends a 1099
   • C. $2,000 or more
   • D. Only above the standard deduction

Your turn

Add up your self-employment profit so far this year and run it through the calculator below. Then schedule your next estimated payment in your IRS online account for the coming due date.