Smart Bookkeeping for Smart Sellers
Estimate your SE tax for Social Security and Medicare
Gross income from self-employment or freelancing
Deductible business expenses
Income from traditional employment (affects Social Security cap)
Self-employment tax is how Social Security and Medicare taxes are collected from self-employed individuals. When you work for an employer, they pay half of these taxes and withhold the other half from your paycheck. As a self-employed person, you are responsible for paying both the employee and employer portions, totaling 15.3% of your net self-employment income.
SE Tax = Net Earnings × 92.35% × 15.3%
The 92.35% factor accounts for the employer portion deduction. The 15.3% rate consists of 12.4% for Social Security and 2.9% for Medicare. For 2025, the Social Security portion applies only to the first $176,100 of net earnings, while the Medicare portion applies to all earnings with no cap.
Rate: 12.4%
2025 Cap: $176,100
No tax on earnings above this amount
Rate: 2.9%
Cap: No limit
Applies to all net earnings
Rate: 0.9%
Threshold: $200,000 (single)
$250,000 (married filing jointly)
Gross Self-Employment Income: $80,000
Business Expenses: $15,000
Step 1 - Calculate Net SE Income:
$80,000 - $15,000 = $65,000
Step 2 - Apply 92.35% Factor:
$65,000 × 0.9235 = $60,027.50
Step 3 - Calculate Social Security Tax:
$60,027.50 × 12.4% = $7,443.41
Step 4 - Calculate Medicare Tax:
$60,027.50 × 2.9% = $1,740.80
Step 5 - Total SE Tax:
$7,443.41 + $1,740.80 = $9,184.21
Deductible Amount: $9,184.21 × 50% = $4,592.11 (reduces your AGI)
You must pay self-employment tax if you had net earnings from self-employment of $400 or more during the year. This includes:
One significant benefit is that you can deduct 50% of your self-employment tax when calculating your adjusted gross income (AGI). This deduction acknowledges that employees do not pay income tax on the portion of FICA taxes paid by their employers. The deduction reduces your income tax liability but not your self-employment tax itself.
Deductible SE Tax = Total SE Tax × 50%
Unlike employees who have taxes withheld from each paycheck, self-employed individuals must make quarterly estimated tax payments to cover both income tax and self-employment tax. These payments are due:
Maximize business deductions: Every legitimate business expense reduces your net self-employment income, which in turn reduces your SE tax. Track all deductible expenses including home office, mileage, equipment, software, and supplies.
Consider S-Corporation election: If your net SE income exceeds $60,000-$80,000, electing S-Corp status may save on SE tax. S-Corp owners pay themselves a reasonable salary (subject to payroll taxes) and take remaining profits as distributions (not subject to SE tax). Consult a tax professional to evaluate if this makes sense for your situation.
Contribute to retirement accounts: SEP-IRA, Solo 401(k), and SIMPLE IRA contributions reduce your taxable income for income tax purposes, though they do not reduce SE tax. However, the overall tax savings can be substantial.
Take the home office deduction: If you use part of your home exclusively for business, you can deduct related expenses either using the simplified method ($5 per square foot up to 300 square feet) or the actual expense method.
Not setting aside enough money: Many self-employed individuals underestimate their tax burden. Set aside 25-30% of your gross income to cover both income tax and self-employment tax obligations.
Missing quarterly payments: Failure to make quarterly estimated payments can result in penalties and interest charges, even if you pay your full tax liability when filing your return.
Not tracking all expenses: Poor record-keeping leads to missed deductions and higher tax bills. Use accounting software or apps to track income and expenses throughout the year.
Confusing gross and net income: SE tax is calculated on net income (after expenses), not gross income. Make sure to subtract all legitimate business expenses before calculating your tax.