Self-Employment Tax Definition and Meaning

The Social Security and Medicare taxes you pay when you work for yourself—15.3% of your net earnings, since you're covering both the employee and employer shares.

When you're an employee, you pay 7.65% of your paycheck toward Social Security (6.2%) and Medicare (1.45%), and your employer matches with another 7.65%. Go freelance or start a business, and you're responsible for both halves—15.3% total. That's the self-employment tax.

The Social Security piece (12.4%) applies to the first $168,600 of net earnings in 2025. Medicare (2.9%) has no cap. And if your self-employment income tops $200,000 (single) or $250,000 (married filing jointly), there's an additional 0.9% Medicare surtax on the excess.

This number catches a lot of new freelancers off guard. Earn $100,000 freelancing and you owe roughly $14,130 in self-employment tax alone—before income tax. Stack federal and state income tax on top, and the total bite is noticeably bigger than what a comparable W-2 employee pays.

The tax code does throw you a few lifelines. You can deduct half of your self-employment tax as an above-the-line deduction (lowering your income tax). Other deductions—home office, health insurance premiums, retirement contributions (SEP IRA, Solo 401k), business expenses, and the qualified business income deduction (up to 20%)—help bring the number down further.

Once your net income climbs past $50,000-$70,000, structuring as an S Corporation can save real money. You pay yourself a "reasonable salary" (subject to payroll taxes) and take the rest as distributions, which aren't hit with self-employment tax.

Frequently Asked Questions

▸How do I reduce self-employment tax?

Maximize business deductions to lower your net self-employment income. If you're earning enough, consider electing S Corp status—it saves 15.3% on distributions above your salary. Retirement contributions (SEP IRA, Solo 401k) reduce taxable income too. The 50% SE tax deduction happens automatically on your return.

▸Do I owe self-employment tax on crypto trading?

Usually not. Capital gains from buying and selling crypto as an investment aren't subject to SE tax. But if you mine crypto, get paid in crypto for services, or run a crypto business, that income is subject to SE tax. It comes down to whether the IRS views it as investing or business activity.