Unit
- Self-employed individual: A person who works for themselves in a trade or business, including freelancers, independent contractors, sole proprietors, and members of partnerships. The key factor is that they are not an employee receiving a W-2. Common examples include graphic designers, consultants, real estate agents, and gig economy workers.
- Taxable income from self-employment: This includes net earnings from a trade or business, which is gross income minus allowable business deductions. It also includes earnings from a partnership where the individual is a general partner. Certain types of income, such as rental real estate (if not a real estate professional) and dividends, are generally excluded.
- Self-employment tax vs. income tax: Self-employment tax is a separate tax imposed under the Self-Employment Contributions Act (SECA). It funds Social Security and Medicare. Unlike income tax, it is based on net earnings from self-employment and is paid in addition to regular income tax.
- Threshold and rate: For 2024, the self-employment tax rate is 15.3% on net earnings up to $168,600 (Social Security portion: 12.4%) and 2.9% on all net earnings (Medicare portion). There is no cap on the Medicare portion.
- Reporting threshold: You must file Schedule SE (Form 1040) if your net earnings from self-employment are $400 or more. If you have church employee income of $108.28 or more, you must also file.
- Who is not self-employed: Employees who receive a W-2, independent contractors who earn less than $400 net, and certain statutory employees (e.g., some drivers, life insurance salespeople) may have different rules. Corporate officers can be employees or self-employed depending on the entity type.
- Trade or business requirement: The activity must be carried on with continuity and regularity, and the primary purpose must be for income or profit. Hobby activities that generate incidental income are not considered a trade or business, and related self-employment tax does not apply.
- Joint vs. separate filing: Married couples who both have self-employment income must each file their own Schedule SE. They cannot combine earnings on one form. Each spouse is individually liable for their own self-employment tax.
- Deduction for half of self-employment tax: When calculating adjusted gross income, you can deduct the employer equivalent portion of your self-employment tax, which is one half of the total self-employment tax paid. This deduction reduces your income subject to income tax but does not affect the self-employment tax itself. It is an above-the-line deduction available regardless of itemization.
- Estimated tax payments for self-employed individuals: Since self-employment income is not subject to withholding, you must pay estimated taxes quarterly using Form 1040-ES. To avoid penalties, total payments including withholding from other sources must equal at least 90 percent of current year tax or 100 percent of prior year tax (110 percent if AGI exceeds $150,000).
- Additional Medicare tax on high earners: For 2024, self-employed individuals with net earnings exceeding $200,000 (single) or $250,000 (married filing jointly) must pay an additional 0.9 percent Medicare tax on earnings above those thresholds. This tax applies only to the employee portion of Medicare tax and is calculated on Schedule 2 of Form 1040.
Self-Employment Tax Rate
15.3%
+0.0% (2024)
Quick Revision
- Self-employment applies to individuals working for themselves in a trade or business.
- Net earnings are gross income minus business deductions.
- Self-employment tax is separate from income tax and funds Social Security and Medicare.
- Rate: 15.3% (12.4% Social Security + 2.9% Medicare) on net earnings.
- Filing threshold: $400 net earnings; use Schedule SE.