Self-Employment Tax Essentials: Rates, Deductions, and Filing Basics

Eligibility to pay self-employment tax in the United States 🇺🇸 depends on how you earn your income and whether your earnings meet IRS thresholds. Use the criteria below to decide if you must file, which forms apply, and how to calculate what you owe.

Quick Yes/No Eligibility Checklist

You likely must pay self-employment tax and file Schedule SE (Form 1040) if:
– Yes — You work for yourself (sole proprietor, independent contractor, or partner) and your net earnings from self-employment are $400 or more.
– Yes — You had church employee income of $108.28 or more.
– Yes — You have a partner’s distributive share of ordinary income or loss from a partnership, which is treated as self-employment income.

You likely do not owe self-employment tax on:
– No — Income earned as an employee (reported on a Form W‑2).
– No — Income from rental real estate (unless you are a real estate dealer).
– No — Dividends from stocks or bonds (unless you are a securities dealer).
– No — Payments to a retired partner that continue after death.
– No — Income received for services as an employee of a state, such as a notary acting as a state employee.

If your answer is “Yes” to one of the first three points, proceed to the requirements. If your income matches items in the second list, that income is not self-employment income.

What Counts as Self-Employment Income

The IRS defines “net income from self-employment” as:
– Gross income from a trade or business
– Minus ordinary and necessary business deductions

A partner’s distributive share of ordinary income or loss is also self-employment income. You report business income and deductions on Schedule C (Form 1040) and then figure self-employment tax on Schedule SE (both filed with your Form 1040). Learn more on the IRS Self‑Employed Individuals Tax Center at this official page: IRS Self-Employed Individuals Tax Center.

According to analysis by VisaVerge.com, many filers confuse gross receipts with net earnings. Remember: the tax applies to net earnings, not total deposits.

Filing Triggers and Required Forms

You must file and pay self-employment tax if:
– Net earnings from self-employment are $400 or more, or
– Church employee income is $108.28 or more

Key forms:
– Schedule SE (Form 1040) to compute self-employment tax: Schedule SE (Form 1040)
– Schedule C (Form 1040) for business income and deductions: Schedule C (Form 1040)
– Form 8959 for Additional Medicare Tax when thresholds are exceeded: Form 8959

Tip: If your net earnings from self-employment are at least $400, you must file a tax return to report the income.

How Self-Employment Tax Works

Self-employment tax (SE tax) under SECA is the Social Security and Medicare tax for people who work for themselves. Employees have these taxes withheld from paychecks; self-employed people compute and pay them using Schedule SE.

• The combined rate is 15.3%:
  • 12.4% for Social Security (up to a wage base)
  • 2.9% for Medicare (no wage base cap)
• In 2024, only the first $168,600 of your self-employment net earnings is subject to the 12.4% Social Security part. All net earnings are subject to the 2.9% Medicare part.

• Before applying the rate, you reduce your net income from self-employment by the “employer-equivalent” share of payroll tax. That reduction is 7.65% (half of 15.3%). The result is your net earnings used to calculate self-employment tax.

Example:
1. Peter has $100,000 of net income from self-employment.
2. He reduces this by 7.65% ($7,650) to get net earnings of $92,350.
3. His SE tax is $92,350 × 15.3% = $14,130.

Note: You can deduct one-half of the SE tax as an adjustment to income on your Form 1040. Income earned as an employee or as a notary acting as a state employee is not subject to SE tax.

Additional Medicare Tax: Who Must File Form 8959

An Additional Medicare Tax of 0.9% applies to Medicare wages, self-employment income, and Railroad Retirement Tax Act (RRTA) compensation above filing-status thresholds. You use Form 8959 to figure this tax and any withholding.

Thresholds:
– Married filing jointly: $250,000
– Married filing separately: $125,000
– Single, Head of household, or Qualifying surviving spouse: $200,000

Key points:
– If you have both wages and self-employment income, combine your Medicare wages and self-employment income to see if you pass the threshold.
– Do not net a self-employment loss against wages for this check.
– RRTA compensation is compared separately to the threshold.

Employers must withhold the 0.9% Additional Medicare Tax on wages above $200,000 in a calendar year, regardless of filing status or income from another employer. If too much is withheld, you reconcile on Form 8959.

You must file Form 8959 if any apply:
– Medicare wages and tips on any single Form W‑2 (box 5) exceed $200,000
– RRTA compensation and tips on any single Form W‑2 (box 14) exceed $200,000
– Total Medicare wages and tips plus self-employment income (including your spouse’s, if filing jointly) exceed your filing-status threshold
– Total RRTA compensation and tips (including your spouse’s, if filing jointly) exceed your filing-status threshold

If you have only self-employment income, the portion above your threshold is subject to the Additional Medicare Tax. If you have both wages and self-employment income, the threshold for applying the 0.9% to your self-employment income is reduced (but not below zero) by your Medicare wages.

Deductions and Common Mistakes

• Some expenses employees cannot claim as itemized deductions may be allowed on Schedule C for self-employed people—for example, certain car expenses. This lowers net income from self-employment and reduces the self-employment tax computed on Schedule SE.
• A self-employment loss does not reduce the Additional Medicare Tax wage test.
• Do not treat dividends, typical rental income, or W‑2 wages as self-employment income, unless you are a dealer as specified (real estate or securities).

Disqualifying Factors: When You Likely Do Not Owe SE Tax

You are likely not subject to self-employment tax on:
– W‑2 employee wages
– Rental real estate income (unless you are a real estate dealer)
– Dividends and interest (unless you are a securities dealer)
– Post-death payments to a retired partner
– State employee services, such as notary income where you serve as a state employee

These amounts may still be taxable for income tax purposes, but they do not go on Schedule SE.

Examples That Clarify Eligibility

• Independent driver with $35,000 gross receipts and $8,000 expenses:
  • Net income from self-employment = $27,000
  • Net earnings for SE tax = $27,000 × (1 − 0.0765) = $24,935.50
  • SE tax = $24,935.50 × 15.3%
  • Must file Schedule SE because net earnings are over $400.
• Tutor with $350 net income:
  • Net earnings are under $400
  • Likely no SE tax filing requirement, though other filing rules may still apply.
• Partner receiving distributive share of ordinary income:
  • Count this in self-employment income and test against the $400 rule.

Alternative Paths if You Don’t Meet the Thresholds

• If your net earnings from self-employment are below $400, the SE tax generally doesn’t apply.
• If you have only W‑2 wages, your employer handles Social Security and Medicare withholding.
• If your income is from sources not treated as self-employment (like dividends or rental income as described), you still report it, but it is not subject to SE tax.

How to Improve Your Position for Compliance

• Keep tight records of income and expenses so your Schedule C reflects true net income.
• Track the $168,600 Social Security wage base and the 0.9% Additional Medicare thresholds to plan for cash flow.
• Use the employer‑equivalent reduction (7.65%) correctly before applying the 15.3% rate on Schedule SE.
• If you receive wages and have self-employment income, watch combined amounts so you know when Form 8959 is required.
• Review whether certain costs (for example, car expenses) are deductible on Schedule C, which reduces net earnings and SE tax.

Key Deadlines and Practical Notes

• File Schedule SE with your Form 1040 when your net earnings from self-employment are $400 or more.
• Pay attention to the 2.9% Medicare portion applying to all net earnings and the 12.4% Social Security portion applying only up to $168,600 in 2024.
• Remember that part of your SE tax is deductible as an adjustment to income, lowering your taxable income.

Important: Keep documentary evidence of income and deductible expenses. Misclassifying income or failing to claim allowable deductions can create unnecessary tax liability or audits.

Final Fit Check: Do You Qualify to Pay SE Tax?

Answer “Yes” if all apply:
– You have business income and deductions producing net earnings from self-employment of $400 or more, or church employee income of $108.28 or more.
– Your income is from self-employment sources (including a partner’s distributive share), not from the list of excluded sources above.
– You’re ready to compute tax using Schedule SE, after reducing net income by 7.65% to reach net earnings for the calculation.

Answer “No” if any apply:
– Your only income is W‑2 wages.
– Your self-employment net earnings are under $400.
– Your income falls into the excluded categories (rents, dividends, certain state employee services, or the specified partner payment).

If “Yes,” complete Schedule C, Schedule SE, and, if needed, Form 8959. If “No,” you likely don’t owe self-employment tax, though standard income tax rules still apply to your other income.