What is Self-Employment Tax?

Definition

Self-employment tax is the Social Security and Medicare tax that self-employed individuals must pay on their net earnings from self-employment. Unlike W-2 employees, where the employer pays half of these taxes, self-employed individuals are responsible for both the employer and employee portions, resulting in a combined rate of 15.3% — 12.4% for Social Security (Old-Age, Survivors, and Disability Insurance) plus 2.9% for Medicare (Hospital Insurance). Calculation: Self-employment tax is calculated on 92.35% of net self-employment earnings (not the full amount), reflecting the fact that employees do not pay FICA on the employer's share. For 2026, the Social Security portion applies to the first $176,100 of combined wages and self-employment income (the wage base is adjusted annually for inflation). The 2.9% Medicare tax has no cap and applies to all net self-employment earnings. Additionally, the 0.9% Additional Medicare Tax applies to self-employment income exceeding $200,000 for single filers ($250,000 for married filing jointly), bringing the Medicare rate to 3.8% on earnings above those thresholds. The $400 Threshold: You must pay self-employment tax if your net earnings from self-employment are $400 or more for the year. This threshold applies to net profit (gross income minus deductible business expenses), not gross revenue. Even if your income tax liability is zero, you may still owe self-employment tax. Deducting the Employer-Equivalent Portion: Self-employed individuals can deduct 50% of their self-employment tax as an above-the-line deduction on Form 1040. This deduction reduces your income tax but does not reduce your self-employment tax itself. Many taxpayers miss this deduction, effectively overpaying their income tax. Quarterly Estimated Payments: Because no employer is withholding taxes, self-employed individuals must make quarterly estimated tax payments using Form 1040-ES. Payments are due April 15, June 15, September 15, and January 15 of the following year. Failing to make adequate estimated payments triggers an underpayment penalty calculated by the IRS on Form 2210. Safe harbor rules allow you to avoid penalties by paying either 100% of the prior year's total tax liability (110% if AGI exceeds $150,000) or 90% of the current year's liability. Self-Employment Tax Abroad and Totalization Agreements: For US citizens and residents working as self-employed individuals abroad, self-employment tax is one of the most commonly overlooked obligations. Critically, the Foreign Earned Income Exclusion (FEIE) does not reduce self-employment tax — even if you exclude $130,000 of earned income from income tax using the FEIE, you still owe SE tax on the full net self-employment earnings. This surprises many US expats in Canada who assume the FEIE covers all US tax obligations. However, Totalization Agreements between the US and certain countries (including Canada) can eliminate double Social Security taxation. Under the US-Canada Totalization Agreement, if you are self-employed and living in Canada, you generally pay into the Canada Pension Plan (CPP) only and are exempt from US self-employment tax. To claim this exemption, you need a Certificate of Coverage from the applicable country's social security administration. Without it, you may owe self-employment tax to both countries. Key Forms: Report self-employment income on Schedule C (Profit or Loss from Business), calculate the tax on Schedule SE (Self-Employment Tax), and make quarterly payments using Form 1040-ES. If claiming a Totalization Agreement exemption, attach the Certificate of Coverage to your return. Common Trap for Cross-Border Freelancers: US citizens freelancing in Canada who earn income from both US and Canadian clients often face complex SE tax calculations. Canadian-source self-employment income may be exempt under the Totalization Agreement, while US-source self-employment income remains subject to SE tax regardless of the FEIE.

Related Forms

Common Mistakes to Avoid

• 1Assuming the Foreign Earned Income Exclusion eliminates self-employment tax — it does not; SE tax is owed on full net earnings regardless of the FEIE
• 2Not claiming the Totalization Agreement exemption when self-employed in Canada, resulting in double Social Security taxation to both CPP and US SE tax
• 3Forgetting the 50% above-the-line deduction for the employer-equivalent portion of SE tax, which reduces income tax liability

Related Terms