Calculating Self-Employment Taxes (SECA)
If you work for yourself as a freelancer, independent contractor, or small business owner, you are responsible for paying Self-Employment Tax. Unlike W-2 employees whose employers cover half of their payroll taxes, self-employed individuals must pay both the employer and employee portions of Social Security and Medicare taxes.
What is the Self-Employment Tax Rate?
The total self-employment tax rate is exactly 15.3%. This consists of two separate parts:
- 12.4% for Social Security (old-age, survivors, and disability insurance)
- 2.9% for Medicare (hospital insurance)
For standard W-2 employees, 7.65% is withheld from their paycheck, and the employer pays the other 7.65%. Because you are both the employee and the employer, you pay the full 15.3%.
How is the Tax Calculated?
Self-employment tax is not applied to your gross revenue. It is applied to your Net Earnings from Self-Employment. This is your gross business income minus your allowable business deductions and expenses.
Furthermore, the IRS grants a slight deduction when calculating the tax basis. You only pay SE tax on 92.35% of your net earnings.
Worked Example: A Freelance Designer
Let's say you operate a freelance graphic design business. You took in $100,000 in gross revenue this year, but you had $20,000 in deductible business expenses (software, home office, advertising). Your Net Earnings are $80,000.
First, calculate the taxable basis: $80,000 × 0.9235 = $73,880.
Next, apply the 15.3% tax rate to the taxable basis: $73,880 × 0.153 = $11,303.64.
Your self-employment tax for the year is $11,303.64. Note that this is in addition to your standard federal and state income taxes.
Important Wage Base Limits
There is a cap on the Social Security portion of the tax. For the 2024 tax year, the Social Security wage base limit is $168,600. If your net earnings (combined with any W-2 income you also have) exceed this limit, the 12.4% Social Security tax stops applying to earnings above the cap. However, the 2.9% Medicare tax has no wage limit and applies to all earnings.