Self-Employment Tax
Definition
The Social Security and Medicare taxes paid by self-employed individuals, covering both the employee and employer portions — totaling 15.3% on net self-employment income.
Self-employment tax is the self-employed equivalent of FICA payroll taxes. Employees pay 7.65% (6.2% Social Security + 1.45% Medicare) with their employer matching the other 7.65%. Self-employed individuals pay both halves: 15.3% total on net self-employment earnings.
The 15.3% rate applies to the first $168,600 of net earnings (2025) for the Social Security portion (12.4%). The Medicare portion (2.9%) has no income cap. An additional 0.9% Medicare surtax applies to self-employment income above $200,000 (single) or $250,000 (married filing jointly).
Self-employment tax often surprises new freelancers and gig workers. Someone earning $100,000 in freelance income owes approximately $14,130 in self-employment tax alone — before any income tax. This is on top of federal and state income tax, making the total tax burden for self-employed individuals significantly higher than comparable W-2 employees.
Tax deductions help offset the burden. You can deduct 50% of self-employment tax as an above-the-line deduction on your income tax return (reducing your taxable income). Additional deductions include: home office, health insurance premiums, retirement contributions (SEP IRA, Solo 401k), business expenses, and qualified business income (QBI) deduction of up to 20%.
Structuring as an S Corporation can reduce self-employment tax for higher-earning freelancers. S Corp owners pay themselves a "reasonable salary" (subject to payroll taxes) and take remaining profits as distributions (not subject to SE tax). This strategy typically saves money when net income exceeds $50,000-$70,000.
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Frequently Asked Questions
How do I reduce self-employment tax?
Maximize business deductions to reduce net self-employment income. Consider S Corporation election for higher earnings (saves 15.3% on distributions). Contribute to retirement accounts (SEP IRA, Solo 401k) which reduce taxable income. The 50% SE tax deduction is automatic and reduces your income tax.
Do I owe self-employment tax on crypto trading?
Generally no. Capital gains from buying and selling crypto as an investment aren't subject to SE tax. However, if you mine crypto, earn crypto as payment for services, or run a crypto business, that income is subject to SE tax. The classification depends on whether it's investment activity or business activity.