When you work for yourself — freelancing, consulting, running a side business — you're responsible for taxes that a W-2 employer normally handles for you. The biggest surprise for most new self-employed workers is the self-employment (SE) tax: a 15.3% levy on top of your regular income tax.
What Is Self-Employment Tax?
Self-employment tax is the self-employed equivalent of Federal Insurance Contributions Act (FICA) taxes — the payroll taxes that fund Social Security and Medicare. W-2 employees split FICA with their employer (each pays 7.65%), but when you're self-employed, you pay both sides.
SE tax rate: 15.3% — made up of 12.4% for Social Security and 2.9% for Medicare. The Social Security portion only applies to net earnings up to the wage base ($176,100 in 2025). Medicare has no cap — and high earners pay an additional 0.9% Medicare surtax above $200,000 (single) or $250,000 (married filing jointly).
The 92.35% Factor
Before calculating SE tax, the IRS lets you reduce your net self-employment income by 7.65% — effectively giving you a deduction that mirrors the employer's share. You multiply your net profit by 0.9235 (that's 100% − 7.65%) to get your taxable SE income.
Jordan earns $100,000 in net self-employment income. SE taxable income is $100,000 × 0.9235 = $92,350. SE tax is $92,350 × 15.3% = $14,130.
SE Tax vs W-2 Payroll Taxes
A common complaint is that self-employed people pay "double" FICA taxes. That's technically true, but two things partially offset the difference:
- The employer-half deduction. You deduct 50% of your SE tax from your adjusted gross income (AGI). This reduces your income tax — though it doesn't reduce the SE tax itself.
- The 92.35% factor. Your SE tax base is already reduced by 7.65%, as described above.
Myth: "Self-employed people pay twice as much tax as employees."
Reality: The extra cost is real but smaller than it appears. After the 92.35% factor and the employer-half income tax deduction, the effective extra cost for self-employment is roughly 2–4% of net income compared to a W-2 employee at the same salary — not a full doubling.
Open the Self-Employment Tax Calculator and enter $80,000 in gross revenue with $0 business expenses. Compare the "Extra vs W-2" figure — that's the true additional tax cost of self-employment at that income level.
Quarterly Estimated Tax Payments
W-2 employees have taxes withheld from every paycheck. Self-employed workers don't — so the IRS requires you to pay estimated taxes four times per year if you expect to owe $1,000 or more.
- Q1: April 15
- Q2: June 15
- Q3: September 15
- Q4: January 15 (of the following year)
Use IRS Form 1040-ES to calculate and submit payments. Most freelancers use the "safe harbor" method: pay at least 100% of last year's total tax (110% if your AGI exceeded $150,000) to avoid underpayment penalties, regardless of what you owe this year.
Priya earned $120,000 freelancing last year and owed $32,000 in total taxes (income + SE). This year she divides $32,000 ÷ 4 = $8,000 per quarter for her estimated payments. If she earns more this year, she'll true up at tax time — but she won't owe a penalty because she met the safe harbor.
What Happens If You Don't Pay Quarterly?
The IRS charges an underpayment penalty — essentially interest on the tax you should have paid during each quarter. The rate fluctuates (it's the federal short-term rate plus 3 percentage points). The penalty isn't huge, but it adds up — and it's completely avoidable with proper planning.
Strategies to Reduce Self-Employment Tax
1. Deduct Business Expenses
SE tax is calculated on net self-employment income — gross revenue minus deductible business expenses. Every legitimate business expense reduces both your income tax and your SE tax.
Common deductions: home office (simplified or actual), health insurance premiums (100% deductible for the self-employed), business equipment, software, professional development, mileage, and phone/internet used for business.
2. Contribute to Retirement Accounts
Solo 401(k) and Simplified Employee Pension (SEP) Individual Retirement Account (IRA) contributions reduce your taxable income (lowering income tax) — though they don't directly reduce SE tax. Still, the combined tax savings can be substantial.
3. Consider an S-Corp Election
An S-Corp lets you split your business income between a "reasonable salary" (subject to FICA) and distributions (not subject to FICA). At higher income levels, the FICA savings on distributions can outweigh the costs of running an S-Corp (payroll processing, additional tax filings, state fees).
This is covered in detail in the Choosing a Business Structure article.
Tax Deductions Specific to the Self-Employed
Beyond the employer-half SE tax deduction, self-employed individuals get access to deductions that W-2 employees don't:
- Self-employed health insurance deduction — Premiums for medical, dental, and long-term care insurance for you, your spouse, and dependents. This is an "above the line" deduction (reduces AGI), not an itemized deduction.
- Qualified Business Income (QBI) deduction — Under Section 199A, you may deduct up to 20% of qualified business income, subject to income phase-outs and limitations for certain service businesses.
- Retirement plan contributions — Solo 401(k) or SEP-IRA contributions are deductible. See the Self-Employed Retirement article.
- Self-employment tax is 15.3% (12.4% Social Security + 2.9% Medicare) on 92.35% of net SE income.
- You deduct the employer-equivalent half of SE tax from your AGI, partially offsetting the "double" cost.
- Quarterly estimated payments are due four times per year if you expect to owe $1,000+. Use the safe harbor to avoid penalties.
- Business deductions, retirement contributions, and entity structure (S-Corp) are the three main levers to reduce your overall tax burden.
If you're considering freelancing or a side business, how would the 15.3% SE tax change the hourly rate you'd need to charge? Open the Freelance Rate Calculator and enter your target take-home pay to see the gross rate needed to cover taxes and expenses.