Self-Employment Tax (Social

Security and Medicare Taxes)

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 Individuals
 Businesses and Self-Employed
o Small Business and Self-Employed
 Employer ID Numbers
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It should be noted that anytime self-employment tax is mentioned, it only refers

to Social Security and Medicare taxes and does not include any other taxes that
self-employed individuals may be required to file. The list of items below should
not be construed as all-inclusive. Other information may be appropriate for your
specific type of business.

 What is Self-Employment Tax?

 Who Must Pay Self-Employment Tax?
 How Do I Pay Self-Employment Tax?
What is Self-Employment Tax?
Self-employment tax is a tax consisting of Social Security and Medicare taxes
primarily for individuals who work for themselves. It is similar to the Social
Security and Medicare taxes withheld from the pay of most wage earners.
You figure self-employment tax (SE tax) yourself using Schedule SE (Form
1040 or 1040-SR). Social Security and Medicare taxes of most wage earners
are figured by their employers. Also, you can deduct the employer-equivalent
portion of your SE tax in figuring your adjusted gross income. Wage earners
cannot deduct Social Security and Medicare taxes.

Self-Employment Tax Rate

The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4%
for social security (old-age, survivors, and disability insurance) and 2.9% for
Medicare (hospital insurance).
For 2020, the first $137,700 of your combined wages, tips, and net earnings is
subject to any combination of the Social Security part of self-employment tax,
Social Security tax, or railroad retirement (tier 1) tax. The amount increased to
$142,800 for 2021. (For SE tax rates for a prior year, refer to the Schedule SE
for that year).
All your combined wages, tips, and net earnings in the current year are subject
to any combination of the 2.9% Medicare part of Self-Employment tax, Social
Security tax, or railroad retirement (tier 1) tax.
If your wages and tips are subject to either social security tax or the Tier 1 part
of railroad retirement tax, or both, and total at least $137,700, do not pay the
12.4% social security part of the SE tax on any of your net earnings. However,
you must pay the 2.9% Medicare part of the SE tax on all your net earnings.
An additional Medicare tax rate of 0.9 % applies to wages, compensation, and
self-employment income above a threshold amount received in taxable years
beginning after Dec. 31, 2012. See the Questions and Answers for the
Additional Medicare Taxpage for more information.
If you use a tax year other than the calendar year, you must use the tax rate
and maximum earnings limit in effect at the beginning of your tax year. Even if
the tax rate or maximum earnings limit changes during your tax year, continue
to use the same rate and limit throughout your tax year.

Self-Employment Tax Deduction
You can deduct the employer-equivalent portion of your self-employment tax in
figuring your adjusted gross income. This deduction only affects your income
tax. It does not affect either your net earnings from self-employment or your
self-employment tax.
If you file a Form 1040 or 1040-SR Schedule C, you may be eligible to claim the
Earned Income Tax Credit (EITC). Learn more about EITC or use the EITC
Assistant to find out if you are eligible.
Self-Employment Health Insurance Tax Deduction
Under Section 2042 of the Small Business Jobs Act, a deduction, for income tax
purposes, is allowed to self-employed individuals for the cost of health
insurance. This deduction is taken into account in calculating net earnings from
self-employment. See the Form 1040  or 1040-SR and Schedule SE
instructions for calculating and claiming the deduction.

Who Must Pay Self-Employment Tax?

You must pay self-employment tax and file Schedule SE (Form 1040 or 1040-
SR) if either of the following applies.

 Your net earnings from self-employment (excluding church employee

income) were $400 or more.
 You had church employee income of $108.28 or more.

Generally, your net earnings from self-employment are subject to self-

employment tax. If you are self-employed as a sole proprietor or independent
contractor, you generally use Schedule C to figure net earnings from self-
employment.
If you have earnings subject to self-employment tax, use Schedule SE to figure
your net earnings from self-employment. Before you figure your net earnings,
you generally need to figure your total earnings subject to self-employment tax. 
Note: The self-employment tax rules apply no matter how old you are and even
if you are already receiving Social Security or Medicare.

Family Caregivers and Self-Employment Tax

Special rules apply to workers who perform in-home services for elderly or
disabled individuals (caregivers). Caregivers are typically employees of the
individuals for whom they provide services because they work in the homes of
the elderly or disabled individuals and these individuals have the right to tell the
caregivers what needs to be done. See the Family Caregivers and Self-
Employment Tax page and Publication 926 for more details.

How to Pay Self-Employment Tax

To pay self-employment tax, you must have a Social Security number (SSN) or
an individual taxpayer identification number (ITIN). 

Obtaining a Social Security Number

If you never had an SSN, apply for one using Form SS-5, Application for a
Social Security Card. You can get this form at any Social Security office or by
calling (800) 772-1213. Download the form from the Social Security Number
and Card website.

Obtaining an Individual Taxpayer Identification Number

The IRS will issue you an ITIN if you are a nonresident or resident alien and you
do not have and are not eligible to get an SSN. To apply for an ITIN, file Form
W-7, Application for IRS Individual Taxpayer Identification Number   PDF . 

Paying Self-Employment Tax with Estimated Taxes

As a self-employed individual, you may have to file Estimated Taxes quarterly.
You can use these estimated tax payments to pay your self-employment tax.
Refer to the Estimated Taxes page and Publication 505, Tax Withholding and
Estimated Taxfor more details on paying your self-employment tax with
Estimated taxes. 

What is Self-Employment?
Self-employment refers to working for oneself rather than working for a specific
employer who pays them a salary. Self-employed individuals often act as independent
contractors by collaborating with other businesses.

 
 

Summary

 Self-employment refers to working for oneself rather than working for a

specific employer who pays them a salary. It is common in a variety of
occupations, but one common theme is that self-employed individuals tend
to be highly skilled in a specific area.
 Some common types of self-employment include independent contractors,
sole proprietorships, and partnerships.
 Advantages of self-employment include being able to work with a high
degree of freedom, independence, and control over business decisions. Still,
 downsides include a high degree of employment risk and a volatile income,
as well as unlimited liability, and taking responsibility for all business
losses.

How Does Self-Employment Work?

Self-employment is common in a variety of occupations, but one common theme is that

self-employed individuals tend to be highly skilled in a specific area. Examples of
occupations in which self-employment is common include various jobs within the
skilled trades, writers, freelancers, artists, lawyers, accountants, financial services
professionals, and investors.

Types of Self-Employment

The three types of self-employed individuals include:

1. Independent contractors

Independent contractors are individuals hired to perform specific jobs for clients,
meaning that they are only paid for their jobs. Since they are not considered employees,
they are not subject to workers’ compensation. Their clients, unlike traditional
employers, do not need to withhold taxes from their payments for completed work.

Some examples of independent contractors include doctors, lawyers, journalists,

accountants, and blue-collar occupations, such as plumbers, electricians, and handymen.

2.  Sole proprietors

Sole proprietorships refer to a type of enterprise that is owned and operated by a single

individual. However, it does not mean that a sole proprietor works individually; often,
they may choose to hire a few employees to help them.

It should be noted that there is no legal distinction between the owner and the business
entity in sole proprietorships, meaning that while the sole proprietor receives all the
profits from the business, they face unlimited responsibility for all losses.

 
3. Partnerships

Partnerships are an arrangement between two or more individuals to manage and

operate a business together and share in its profits and losses. It is somewhat similar to
sole proprietorships, except that there is now more than one person with operational
control.

There are different types of partnerships, ranging from general partnerships that enable

all members to share profits and liabilities equally to other forms of partnerships where
some partners might face limited liability. Sometimes, partners can also be “silent
partners,” which means that a partner is not involved in the day-to-day operations of the
business but contributes capital to the business instead.

Self-Employment vs. Entrepreneurship vs. Startup

It is also important to distinguish self-employment from other terms such as

entrepreneurship and a startup. Entrepreneurship typically refers to the process of
designing, launching, and operating a new business. It encompasses all new
organizations, including small businesses that never intend to grow big and become
registered, while a startup is a temporary new organization that is created with the
intention to become larger beyond the founders and owners, and hire employees.

It should be noted that a self-employed individual is not the same as a business owner
since the latter may hire employees to work for them and become the boss with
responsibilities of supervising others while managing operations.

Business owners can also refer to owners who hold an ownership stake in the company
but are not involved in the day-to-day operations, similar to a “silent partner” in some
partnerships. However, self-employed individuals both own the business and are also
the primary operator.

Self-Employment and Taxation

Self-employed individuals are considered to be running a business as an independent

contractor, a sole proprietor, or a member of a partnership. In addition to income taxes,
they need to pay Social Security and Medicare taxes in the form of a Self-Employment
Contributions Act (SECA) tax. The self-employed individual pays both the employer
and employee portion of the taxes since their clients do not withhold taxes.

Currently, the self-employment tax is 15.3% as of 2020, and 12.4% goes to Social
Security on the first $137,000 of earnings, and 2.9% goes to Medicare tax.

Advantages of Self-Employment
One of the most notable advantages of self-employment is perhaps the large degree of
freedom and flexibility involved. It allows the individual to do things that they love,
set customized working hours, decide what work to do or not do, and often involves
working from home, which saves a large amount of commuting time.

Self-employed individuals are able to become their own boss, enjoy unlimited amounts
of creativity without fear of opposition from a manager, and exert complete control over
most business decisions. Finally, with self-employment comes a sense of pride and
achievement in creating a successful business and the power to make changes as one
feels necessary.

Disadvantages of Self-Employment

There are also disadvantages associated with self-employment though, such as the high
uncertainty of employment and financial risk. While self-employed individuals are not
limited in their salary, there is also the chance that one may not get a salary at all if the
business is unprofitable. They also need to absorb all the losses and face unlimited
liability, meaning that they need to shoulder all expenses themselves.

Financial downsides are also present, such as the need to pay the employer half of the
self-employment tax for Social Security and Medicare. Health insurance common in
employer-provided healthcare plans are unavailable, and self-employed individuals
 need to fund their own health insurance. In addition, self-employed individuals also do
not receive the financial match that employers typically contribute to retirement plans.

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Working for yourself

If you start working for yourself, you’re classed as a sole trader.
This means you’re self-employed - even if you haven’t yet told HM
Revenue and Customs (HMRC).

Running a business
You’re probably self-employed if you:

 run your business for yourself and take responsibility for its
success or failure
 have several customers at the same time
 can decide how, where and when you do your work
 can hire other people at your own expense to help you or to do
the work for you
 provide the main items of equipment to do your work
 are responsible for finishing any unsatisfactory work in your own
time
 charge an agreed fixed price for your work
 sell goods or services to make a profit
Many of these also apply if you own a limited company but you’re
not classed as self-employed by HMRC. Instead you’re both an
owner and employee of your company.

You can be both employed and self-employed at the same time,

for example if you work for an employer during the day and run
your own business in the evenings.

You can check whether you’re self-employed:

 online
 by phone

Selling goods or services

You could be classed as a trader if you sell goods or services. If
you’re trading, you’re self-employed.

You’re likely to be trading if you:

 sell regularly to make a profit

 make items to sell for profit
 sell items on a regular basis, either online, at car boot sales or
through classified adverts
 earn commission from selling goods for other people
 are paid for a service you provide
If you only occasionally sell items or rent out property (for
example through auction websites or short-term rental
apps), check if you need to tell HMRC about this income.
Contact HMRC for advice if you’re not sure whether you’re
trading.

Registering as self-employed
If you’re self-employed, you may need to set up as a sole trader.
 Other ways to work for yourself
There are other business structures apart from being a sole
trader. For example, you can:

 become a partner in a business partnership

 set up your own limited company

Get help with your business

You can get help with setting up or growing your business, for
example with funding your idea.

What Is Self-Employment?
A self-employed person does not work for a specific employer who pays them a
consistent salary or wage. Self-employed individuals, or independent contractors, earn
income by contracting with a trade or business directly.

In most cases, the payer will not withhold taxes, so this becomes the responsibility of
the self-employed individual.

Self-employed persons may be involved in a variety of occupations but generally are

highly skilled at a particular kind of work. Writers, tradespeople, freelancers,
traders/investors, lawyers, salespeople, and insurance agents all may be self-employed
persons.1

KEY TAKEAWAYS

Those who are self-employed work solely for themselves and contract directly

with clients.
 Self-employment may not be subject to tax withholding, so those who are self-
employed are responsible for paying their taxes.
 Self-employment can provide a great deal of job flexibility and autonomy;
however, it also comes with a greater degree of employment risk and a more-
volatile income.
Volume 75%
 
1:34
Self-Employed
Self-Employed vs. Business Owner
Although the precise definition of self-employment varies among the U.S. Bureau of
Labor Statistics (BLS), the Internal Revenue Service (IRS), and private research firms,
those who are self-employed include independent contractors, sole proprietors of
businesses, and individuals engaged in partnerships.

A self-employed person refers to any person who earns their living from any
independent pursuit of economic activity, as opposed to earning a living working for a
company or another individual (an employer). A freelancer or an independent contractor
who performs all of their work for a single client may still be a self-employed person.2

A self-employed person is not often the same thing as being a business owner. The
owner of a business, for instance, may hire employees and essentially become the boss
—an employee-owner who operates and manages the business.

Alternatively, a business owner has an ownership stake but may not be involved in the
day-to-day operations of the company. In contrast, a person who is self-employed both
owns the business and is also the primary or sole operator. The taxation rules that apply
to those who are self-employed differ from the employee or a business owner.3

Independent contractors, sole proprietors of businesses, and individuals joined in a

partnership are all self-employed persons.

Types of Self-Employment
Independent contractors are businesses or individuals hired to do specific jobs. They
receive payment only for the jobs that they do. Because they are not considered
employees, they do not receive benefits or workers’ compensation, their clients do not
withhold taxes from their payments for work performed, and equal opportunity laws do
not apply to them.4

Examples of independent contractors include doctors, journalists, freelance workers,

lawyers, actors, and accountants who are in business for themselves. It is worth noting
that independent contractors are not just limited to specialized fields. An NPR/Marist
poll conducted in December 2017 found that one in five jobs in the United States is a
contracted worker as opposed to a full-time employee.5

Sole proprietors are the only owners of unincorporated businesses, while partnerships

involve two or more self-employed people who form a business together.6 7 Independent
contractors, sole proprietors, and partnerships often hire a small number of employees to
help them with their work.

According to a Gallup survey commissioned by Quickbooks and published in 2019, as

of 2017 (the most recent figure as of early 2020), self-employed people and their
employees accounted for 28% of the workforce in the United States (including people
with multiple jobs who are both employees and self-employed). The industries with the
highest rates of independently employed people include agriculture, construction, and
business and professional services.8
However, the report took pains to point out in an executive summary that “it is
important to note this research was conducted before the COVID-19 pandemic, which
has clearly impacted the way Americans work today.”9 With the increasing prevalence
of Americans working from home or losing jobs due to the pandemic, it’s very likely
that the ranks of the self-employed have swelled even more.

28%
The percent of the workforce that is self-employed as of 2017 (the most recent figure as
of late 2020)
Special Considerations
Taxes for the Self-Employed
A self-employed person must file annual taxes and pay estimated quarterly tax. On top
of income tax, they are also, typically, required to pay a self-employment tax of 15.3%.
Of this tax, 12.4% goes to Social Security on the first $137,700 of earningsas of 2020
($142, 800 in 2021) and 2.9% goes to Medicare tax.1 0

The self-employed person will pay the employer and the employee portion of Social
Security and Medicare taxes. Those who make less than an annual net profit of $400 are
exempt from paying taxes on that income.2

The gig economy, a phenomenon that emerged with digitalization, includes everything

from Uber drivers to dog walkers to consultants. There are upsides and downsides to
being a gig worker. The advantages are, of course, flexibility and control, but the
disadvantages are that there is no guarantee of work, the pay is often low, and there are
no employee benefits such as sick leave or a healthcare plan. Gig workers must be
disciplined when it comes to paying taxes because they do not receive W-2s and must
handle all tax withholding independently.

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ARTICLE SOURCES

Related Terms

How Household Employees Work

A household employee is an individual who is paid to provide a service for

their employer within the person's place of residence.

 more

Self-Employed Person
A self-employed person is an independent contractor or sole proprietor
who reports income earned from self-employment. 

more

Independent Contractor

An independent contractor is a person or entity engaged in a work

performance agreement with another entity as a nonemployee.

 more

Subcontracting

Subcontracting is the practice of assigning part of the obligations and

tasks under a contract to another party known as a subcontractor.

 more

California Assembly Bill 5 (AB5) Definition

California's AB5 set rules for gig workers and firms hiring them. AB2267
modified them and Prop. 22 exempted app-based drivers and companies.

 more

Payroll

Payroll is the compensation a business must pay to its employees for a

set period or on a given date. Read about payroll accounting here.

 more

Thinking about self-employment?

Self-employment is an option for workers in many career fields and industries. It can
help you start, advance, or round out your career. Read about different types of self-
employment, and then read about some of the pros and cons to self-employment.

Self-employment options
Gig employment. You may have been hearing of and reading about the so-called gig
economy with more and more frequency over the past few years. But there is no official
definition of the “gig economy”—or, for that matter, a gig. The U.S. Department of
Labor defines a gig as a single project or task for which a worker is hired, often through
a digital marketplace, to work on demand.
Some gigs are a type of short-term job, and some workers pursue gigs as a self-
employment option; those concepts aren’t new. However, companies connecting
workers with these jobs through websites or mobile applications (more commonly
known as apps) is a more recent development. Learn more about working in a gig
economy from the Bureau of Labor Statistics.
Freelance. Being a freelancer isn’t necessarily different than working in the gig
economy. But the term is often used to apply to more skilled and long-term projects.
Freelancing simply means you offer your unique skills or talent on a pay-for-service
basis, outside of a regular employer-employee relationship. Common freelance options
include:
 Web design
 Writing

 Repair work (specializing in jewelry, furniture, vehicles, or other areas)

 Landscaping

 Accounting

 Photography

 Personal training/fitness coaching

Start your own business. Running your own business isn’t necessarily different from
freelancing: some freelancers are running their own business, and even employing
others to help them conduct their business. But here, we’re talking about running a
business that has a physical location and/or employs others to make or sell goods or
provide services. You might do this by starting your own business, buying a stand-alone
existing business, or joining a franchise program. Learn more about planning,
launching, managing, and growing your business from the Small Business
Administration.

Is self-employment right for you?

Working for yourself can be a great way to tailor your work to your specific talents and
interests. It can also be a great way to be able to set your own schedule and workplace
expectations. But, being self-employed can have challenges too. It’s best for people who
are motivated and able to keep themselves on task. Check out these lists of benefits and
challenges to self-employment to help you decide if it’s right for you.
Benefits to self-employment
 Opportunity to do what you love. It can be easier to tailor self-employment
directly to your own interests, skills, and values than it is to match those
qualities as an employee. As your own boss, you get to choose which
projects to accept or decline as well.
 More flexibility. You can have more say over your hours, location, and
working conditions such as dress code, break times, environment, etc.
  Expenses. There are some work-related expenses you can often cut when
you’re self-employed: you’ll often spend less on your commute and your
wardrobe, and you can usually save more tax-free for retirement as well as
deduct additional business expenses (but read about taxes in the below list
of challenges too!)
Challenges to self-employment
 Lack of benefits. Don’t underestimate the value of benefits you might receive
as an employee. Employer-paid portions of health-care, retirement
contributions, education reimbursement, and paid time off can add up to l
nearly 40 percent of a salary.
 Increasedrisk. It’s true you can’t get fired when you’re your own boss, but
you also have no paycheck to fall back on when business is slow or
something else goes wrong.
 Taxes. Taxes can—but don’t always have to—become more complicated in
self-employment. Depending on your situation, you might have to hire an
accountant. And while there are some tax advantages, don’t forget that you
also have to pick up the half of employment taxes (Social Security and
Medicare) that employers are responsible for—that adds another 7.5
percent to your tax rate. Read more about self-employment tax form the
IRS.

More Resources