Self-employment tax

Self-employment tax is a federal tax that covers Social Security and Medicare contributions for individuals who work for themselves.

Homebase Team

Min Read

What is self-employment tax?

Self-employment tax is a federal tax that covers Social Security and Medicare contributions for individuals who work for themselves. If you're a freelancer, contractor, or small business owner and earn more than $400 in a year, you're generally required to pay self-employment tax on your net earnings.

Unlike traditional employees whose payroll taxes are split between themselves and their employers, self-employed individuals must pay the full amount—both the employee and employer portions. Understanding and planning for this tax is crucial for small business owners to stay compliant and avoid surprises during tax season.

Businesses that rely on independent contractors or freelancers must keep proper records and issue the correct forms, like 1099-NECs. Homebase helps small businesses streamline workforce management and handle contractor payments with built-in tools that make tax prep easier.

What does self-employment tax cover?

Self-employment tax funds the same benefits as traditional payroll taxes:

Social Security – Retirement, disability, and survivor benefits.
Medicare – Health insurance coverage for individuals 65 and older or those with certain disabilities.

In 2025, the self-employment tax rate is 15.3%:

12.4% for Social Security (on the first $168,600 net earnings).
2.9% for Medicare (on all net earnings).
An additional 0.9% Medicare surtax may apply to earnings over $200,000 (for single filers) or $250,000 (for joint filers).

Who has to pay self-employment tax?

You must pay self-employment tax if you:

Earn $400 or more in self-employment income during the year.
Operate as a sole proprietor, independent contractor, gig worker, or freelancer.
Are a partner in a business partnership.

Even if you're also employed by a company and receive a W-2, you'll still owe self-employment tax on any side income you earn through freelance or contract work.

How is self-employment tax calculated?

To calculate self-employment tax:

Determine your net earnings – Use Schedule C (Profit or Loss from Business) to calculate your total income minus expenses.
Apply the self-employment tax rate – Multiply your net income by 92.35% (to account for the employer-equivalent portion), then apply the 15.3% tax rate.
Complete IRS Form SE – Use this form to report your self-employment tax on your tax return.

The IRS provides a self-employment tax calculator, or you can use accounting software or payroll tools that automate this process.

Can you deduct self-employment tax?

Yes. Self-employed individuals can deduct half of their self-employment tax (the "employer" portion) as an adjustment to income on their federal tax return. This deduction lowers your taxable income but doesn’t reduce your self-employment tax liability.

Other common tax deductions for self-employed individuals include:

Business-related expenses (equipment, travel, software, etc.)
Health insurance premiums
Home office expenses
Retirement plan contributions

When and how do you pay self-employment tax?

Self-employed individuals typically pay estimated taxes quarterly. These payments cover:

Income tax on your earnings
Self-employment tax for Social Security and Medicare

You can calculate and pay estimated taxes using:

IRS Form 1040-ES
IRS Direct Pay or EFTPS (Electronic Federal Tax Payment System)

Failing to pay on time may result in penalties and interest, so it’s important to plan ahead.

How does this impact employers who work with contractors?

Businesses that hire freelancers or independent contractors do not withhold payroll taxes from contractor payments. However, they must:

Collect a W-9 form from each contractor.
Issue a 1099-NEC form for payments totaling $600 or more.
Maintain accurate records for IRS reporting.

Using Homebase Payroll, businesses can manage contractor payments, generate 1099s, and reduce the risk of misclassification or reporting errors.

Try Homebase Payroll today to simplify contractor management and ensure accurate tax reporting.

How Homebase supports businesses and contractors

Self-employment tax can quickly get complicated for both independent contractors and the businesses that pay them. That’s where Homebase comes in. With tools built for small businesses, Homebase makes it easy to:

Track payments to freelancers and contractors.
Automate 1099 generation and delivery.
Ensure timely and accurate record-keeping.
Stay compliant with IRS tax requirements.

Sign up for Homebase today to streamline contractor payments and minimize tax headaches.

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