Self-employment tax is a tax that covers Social Security and Medicare contributions for individuals who are self-employed. Unlike employees who split these taxes with their employers, self-employed individuals must pay the full tax themselves. This tax is separate from income tax and applies to earnings from self-employment.
The self-employment tax rate is:
- 12.4% for Social Security.
- 2.9% for Medicare.
Self-employed individuals must report and pay this tax using Schedule SE when filing their annual tax return (Form 1040). They may also need to make estimated tax payments throughout the year to cover both self-employment tax and income tax.
Self-employed taxpayers can deduct the employer-equivalent portion of self-employment tax (50%) when calculating their adjusted gross income, reducing their overall tax liability.