What Small Business Owners Need to Know About Self-Employment Taxes
Running your own business is exciting and rewarding, but it also comes with responsibilities—especially when it comes to taxes. If you're self-employed, one of the most important tax considerations is the self-employment tax. Understanding how it works, what it covers, and how to manage it is essential for keeping your business financially healthy and compliant with IRS rules.
In this comprehensive guide, we’ll break down what small business owners need to know about self-employment taxes, including who must pay, how much you’ll owe, and strategies to reduce your tax burden.
What Is Self-Employment Tax?
Self-employment tax is a federal tax that covers Social Security and Medicare for individuals who work for themselves. When you’re employed by a company, these taxes are automatically deducted from your paycheck. However, if you’re self-employed, you’re responsible for both the employer and employee portions.
What does it include?
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Social Security tax (12.4%)
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Medicare tax (2.9%)
That’s a total of 15.3% on your net self-employment income.
Who Has to Pay Self-Employment Tax?
If you operate as a:
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Sole proprietor
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Independent contractor
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Freelancer
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Partner in a partnership
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Member of an LLC (that is not taxed as a corporation)
And you earn $400 or more in net self-employment income during the year, you are required to pay self-employment tax.
Note: Even if you’re a part-time freelancer or side hustler, once you hit that $400 threshold, you must file.
How to Calculate Self-Employment Tax
To calculate your self-employment tax, follow these steps:
1. Determine your net income
Your net self-employment income is your total business income minus allowable business expenses.
2. Multiply net income by 92.35%
Only 92.35% of your net income is subject to self-employment tax. This accounts for the employer-equivalent portion being deductible.
3. Apply the 15.3% tax rate
Multiply that amount by 15.3% (12.4% for Social Security + 2.9% for Medicare).
Example:
Self-Employment Tax vs. Income Tax
Self-employment tax is in addition to your federal and (if applicable) state income taxes. This means small business owners often face a higher overall tax burden compared to traditional employees.
Breakdown:
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Self-employment tax: covers Social Security and Medicare
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Income tax: based on your total income, minus deductions and credits
So even after paying self-employment tax, you’ll still need to calculate and pay income tax based on your tax bracket.
How to Pay Self-Employment Taxes
Since no employer is withholding taxes for you, the IRS expects you to make estimated quarterly payments throughout the year.
Quarterly tax deadlines:
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April 15 – Q1 payment
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June 15 – Q2 payment
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September 15 – Q3 payment
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January 15 (of the following year) – Q4 payment
Failing to make quarterly payments can lead to underpayment penalties and interest charges.
Use Form 1040-ES to calculate and submit your estimated taxes. Payments can be made through the IRS Direct Pay system or EFTPS.
Self-Employment Tax Deduction
The good news? You can deduct the employer-equivalent portion (50%) of your self-employment tax when calculating your adjusted gross income (AGI) on your tax return.
This deduction:
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Reduces your taxable income
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Helps offset some of the tax burden
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Is available even if you don’t itemize deductions
Example:
If your total self-employment tax is $7,000, you can deduct $3,500 on your return.
How to Reduce Self-Employment Taxes Legally
Nobody enjoys paying more taxes than necessary. Fortunately, there are several legal ways to reduce your self-employment tax burden.
1. Maximize business deductions
Track and claim all eligible business expenses:
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Office supplies
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Internet and phone usage
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Business meals and travel
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Advertising and marketing
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Software and subscriptions
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Home office deduction (if applicable)
2. Form an S Corporation
Once your business reaches a certain income level, electing to be taxed as an S Corp may reduce your self-employment taxes. In an S Corp:
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You pay yourself a reasonable salary (subject to employment tax)
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Remaining profits are treated as distributions, which are not subject to self-employment tax
3. Contribute to retirement accounts
Putting money into retirement plans like a Solo 401(k) or SEP IRA reduces your taxable income and helps you save for the future.
4. Hire a tax professional
A skilled accountant or tax advisor can help you optimize your deductions and choose the best tax structure for your business.
Self-Employment and Medicare Surtax
If your net income exceeds certain thresholds, you may be subject to an additional 0.9% Medicare tax.
Income thresholds:
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$200,000 for single filers
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$250,000 for married filing jointly
This surtax applies only to the portion of income above those thresholds and is calculated separately from the standard 2.9% Medicare tax.
What Happens If You Don’t Pay Self-Employment Tax?
Avoiding self-employment tax—or simply not knowing you owe it—can lead to serious consequences, including:
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IRS penalties and interest
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Difficulty qualifying for Social Security benefits
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Potential audits or fines
Self-employment tax also affects your future Social Security earnings. The more you pay in, the more you may receive when you retire.
Tools to Simplify Self-Employment Tax Tracking
Managing taxes as a small business owner doesn’t have to be overwhelming. Use these tools to stay organized:
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QuickBooks Self-Employed – tracks income, expenses, and calculates estimated taxes
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FreshBooks – ideal for service-based freelancers and contractors
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Keeper Tax – automates expense tracking and deduction discovery
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IRS Direct Pay – for submitting estimated tax payments online
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TurboTax Self-Employed – for filing your return with support for deductionsFinal Thoughts: Take Control of Your Self-Employment Taxes
Self-employment tax is a reality for small business owners—but it doesn’t have to be a burden. With the right knowledge, smart planning, and helpful tools, you can stay compliant, reduce your tax bill, and build a stronger financial foundation for your business.
Start by tracking your income and expenses, pay estimated taxes quarterly, and consider working with a tax professional. The better your tax strategy, the more freedom you’ll have to grow your business with confidence.
