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Self-employment tax consists of Social Security and Medicare tax, which are the same taxes that would be withheld from your pay if you worked for an employer. If you work for yourself, you’ll need to ensure you’re handling your tax filing correctly. That means paying self-employment tax, typically in four estimated quarterly installments along with any federal, state, and local income tax owed.

Here’s what you should know about self-employment tax if you’re contemplating being your own boss or are already up and running as a freelancer.

What Is Self-Employment Tax?

Self-employment tax is the income tax you pay on net earnings, as mandated by the Self-Employment Contributions Act (SECA). The IRS determines who must pay self-employment tax.

SECA taxes help to fund Social Security and Medicare benefit programs for people who are elderly, retired, or disabled, as well as their eligible dependents. That’s the same as Federal Insurance Contributions Act (FICA) taxes, which are part of your income tax withholding if you work for an employer.

Self-employment tax exists to ensure that people who work for themselves pay their share of federal income tax. It’s important to understand how much you’re making and what tax bracket you’re in, and to report your self-employment income accurately, because what you earn influences what you’ll be able to collect from Social Security when you retire.

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How Much Is Self-Employment Tax?

The Internal Revenue Service sets the self-employment tax rate at 15.3%. There are two parts to the tax:

•   12.4% for Social Security, which is also referred to as Old-Age, Survivors, and Disability Insurance (OASDI)

•   2.9% for Medicare

The amount you pay in self-employment tax depends on how much you earn from self-employment for the year and what you deduct. It doesn’t matter what profession you are pursuing, whether you’re an actor or a nature photographer (which can be a good job for introverts).

What is the amount of the self-employment tax (SECA), and how does it compare to FICA taxes? The tax rates are the same. What’s different is how they’re paid.

•   If you’re self-employed, you’re responsible for calculating and paying all SECA taxes.

•   If you work for someone else, your employer determines how much to withhold from your checks each pay period.

Employers cover half of the tax for their employees. So, instead of paying 15.3% yourself, you’d pay 6.2% for OASDI (Social Security) taxes and 1.45% for Medicare tax, while your employer pays the rest.4 However, you as a self-employed individual may deduct the other half of this payment (the portion an employer would pay) on your tax return when calculating your adjusted gross income.

Recommended: How Much Do You Have to Make to File Taxes?

Who Has to Pay Self-Employment Tax?

The IRS requires you to pay self-employment tax if either of the following is true:

•   Your net earnings from self-employment are $400 or more

•   You had church employee income of $108.28 or more

Those rules apply to sole proprietors, independent contractors, partners, and single-member limited liability corporations (LLCs).

Net earnings are the part of your gross income you keep after subtracting “ordinary and necessary” trade or business expenses. If you’re self-employed as a sole proprietor or independent contractor, you use Schedule C to calculate your net earnings from self-employment. Self-employment tax is reported on Schedule SE of your Form 1040.

There’s no age exemption for self-employment tax; if you owe it, you’ll need to pay it even if you already receive Social Security benefits.

Self-Employment Tax Rate for 2024 and 2025

If you’re preparing for tax season, it helps to know if there are any updates to tax rates. The self-employment tax rate for 2024 is 15.3%; it’s the same for 2025. So for returns you file in 2025 and 2026, you’ll calculate self-employment tax as 15.3% of net earnings.

What’s different for each tax year is the amount of your net earnings that are subject to Social Security tax. This is called the wage base limit.

•   For 2024, the wage base limit for the Social Security portion of self-employment tax is $168,600.1

•   For 2025, the wage base limit increases to $176,100.

How much is self-employment tax, in terms of your total income? According to the IRS, the amount of net earnings subject to self-employment tax is 92.35%. All your net earnings are subject to the Medicare tax.

Certain self-employed individuals are subject to an additional Medicare tax of 0.9%. This tax applies if your income is above a certain threshold for your filing status. Here are the current thresholds for both 2024 and 2025.

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How to Calculate Self-Employment Tax

A self-employment tax calculator (options are available online) can help you estimate what you’ll owe, and using an online budget planner can help you monitor your money year-round.

That said, you don’t always have to rely on tech. It’s possible to do the calculations yourself. Here’s how to calculate self-employment tax in a few simple steps.

1.   Calculate your net earnings from self-employment, which again is the difference between your gross income and deductible expenses.

2.   Multiply your net earnings by 92.35%.

3.   If the amount is less than $168,100, multiply it by 12.4% to calculate your Social Security tax. Otherwise, multiply $168,100 by 12.4%.

4.   Multiply the amount you got in step two by 2.9% to calculate your Medicare tax.

You should now have two amounts. The final step is to add them together.

Example Self-Employment Tax Calculation

If you’re new to self-employment tax (and possibly paying taxes for the first time as well), it can help to have an example to follow of how to calculate what you owe.

Say you start an e-commerce store. You bring in $110,000 in gross income and have $10,000 in home office expenses, leaving you with $100,000 in net earnings. Now you can do the math.

•   $100,000 x 92.35% = $92,350

•   $92,350 x 12.4% = $11,451.40

•   $100,000 x 2.9% = $2,678.15

•   $11,451.40 + $2,678.15 = $14,129.55 in self-employment tax

You can deduct one-half of what you pay in self-employment tax. Deductions reduce your taxable income for the year, which can help you to owe less or get a bigger refund.

How to Pay Self-Employment Tax

Self-employment tax is typically paid in four installments, called quarterly estimated payments. These payments reflect the amount you estimate you’ll owe in taxes based on your expected net earnings.

Quarterly payments are typically due:

•   April 15 for income earned from January 1 to March 31

•   June 15 for income earned from April 1 to May 31

•   September 15 for income earned from June 1 to August 31

•   January 15 of the following year for income earned from September 1 to December 31

Making quarterly payments doesn’t mean you don’t have to file a federal income tax return. You don’t want to miss your tax filing deadlines for those quarterly payments, but you’ll still need to hit the annual tax filing deadline, which is usually April 15.

If you’ve underpaid your estimated taxes, you may owe when you file. The IRS could also impose an underpayment penalty if you owe more than $1,000. Underpayments and missed payments are two of the biggest tax filing mistakes to avoid when you’re self-employed.

Tax Deductions for Self-Employment

Claiming tax deductions can shrink your taxable income. Some deductions are designed for people who are self-employed or run businesses, while other deductions are available to anyone who qualifies.

Examples of self-employed deductions include:

•   Half of the self-employment tax you paid, as noted above

•   Contributions to a self-employed retirement plan, such as a solo 401(k) or SEP IRA

•   Contributions to a traditional IRA

•   Health Savings Account (HSA) contributions (if you have a high deductible health plan)

•   Health insurance premiums

•   Home office expenses (an online money tracker can help you keep tabs on these)

•   Mileage and travel expenses, if that applies to the type of business you run

You may also be able to claim other deductions as well, based on how you file. For example, a sole proprietor can write off mortgage interest, student loan interest, and charitable contributions alongside business expenses.

Worth noting: If you’re filing taxes on investment income, you can also deduct expenses related to maintaining the property.

The Takeaway

Self-employment tax refers to the Social Security and Medicare taxes that earners who are not employees must pay. Typically, employers pay half this amount, but the self-employed must pay the full 15.3% amount and can then deduct half when doing their taxes. Understanding how and when self-employment taxes are due can play an important role in tracking and managing your money well.

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FAQ

Why do I have to pay self-employment tax?

You have to pay self-employment tax because that is the law. Paying self-employment tax isn’t that different from the tax withholding your employer would take from your check if you had a regular 9 to 5 job.

What is 30% tax for self-employed?

The 30% rule of thumb for self-employed taxpayers suggests holding back 30% of your gross income to cover your tax obligations. The idea is that by setting aside this much, you should be able to comfortably cover your self-employment tax obligations.

What is the 20% self-employment deduction?

Some self-employed individuals may be able to take advantage of the Qualified Business Income (QBI) deduction. This deduction allows you to write off up to 20% of your QBI, plus 20% of any qualified real estate investment trust (REIT) dividends you receive. This deduction is only available, however, to businesses in certain trades and industries.

How do I get the biggest tax refund when self-employed?

Getting a tax refund means that you’ve paid in more tax than you owe. The simplest way to increase your refund size is to maximize your deductions. Maxing out a tax-advantaged retirement plan, itemizing every eligible business expense, and deducting other expenses, like charitable contributions or mortgage interest, could help you snag a bigger refund.

How much can an LLC write off?

Technically, there’s no limit on the dollar amount an LLC, or limited liability company, can write off. However, each expense you deduct must be legitimate and reflect the amount you actually spent. It’s wise to keep a paper or digital trail to document your deductible business expenses, just in case the IRS comes knocking with an audit.

What happens if my LLC makes no money?

If your only source of income is an LLC and you make no money, then you wouldn’t owe any taxes since there are no net earnings to report. You would, however, still need to file your return and document any net operating losses. A net operating loss happens when your business spends more than it brings in.

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Employee stock options (ESOs) are different from restricted stock units (RSUs). They are both types of deferred compensation, and can be used as incentives, but employee stock options are similar to a call option. They give employees the option to buy company stock at a certain price, by a certain date. RSUs simply give an employee shares of stock on a given date.

Generally speaking there are specific terms the employee must meet in order to get either kind of stock. For example, an employee must work for the company for a year, and then obtain shares on a vesting schedule (i.e., shares become available over time, not all at once).

Sometimes, employees get a choice between ESOs and RSUs. Understanding how each stock plan works, how they differ — particularly when it comes to vesting schedules and taxes — can help you make a decision that best aligns with your financial goals.

What Are Employee Stock Options (ESOs)?

Employee stock options (ESOs) give an employee the right to purchase their company’s stock at a set price — called the exercise, grant, or strike price — by a certain date, assuming certain terms are met, usually according to a vesting schedule. In this way, they are similar to call options (a type of derivative contract).

If the employee doesn’t exercise their options within that period, they expire.

Companies may offer stock options to employees as part of a compensation plan, in addition to salary, 401(k) matching funds, and other benefits. ESOs are considered an incentive to help the company succeed, so that (ideally) the stock options are worth more when the employee chooses to exercise them.

In an ideal scenario, exercising stock options allows an employee to purchase shares of their company’s stock at a price that’s lower than the current market price — and realize a profit.

Note that while some of the features of employee stock options are similar to trading stock options, these contracts aren’t exactly the same, and you can’t trade ESOs. Also, options are derivatives based on the value of underlying securities, e.g. stocks, bonds, ETFs — they aren’t a type of employee compensation.

How Do ESOs Work?

Generally, ESOs operate in four stages — starting with the grant date and ending with the exercise date, i.e. actually buying the stock.

1. The Grant Date

This is the official start date of an ESO contract. You receive information about how many shares you’ll be issued, the strike price (or exercise price) for those shares, the vesting schedule, and any requirements that must be met along the way.

2. The Cliff

If a compensation package includes ESOs, they’re generally not available on day one. Contracts often include requirements that must be met first, such as working full time for at least a year.

Those 12 months when you are not yet eligible to exercise your employee stock options is called the cliff. If you remain an employee past the cliff date, you get to level up to the vesting period.

Some companies include a 12-month cliff to incentivize employees to stay at least a year. Other companies may have a vesting schedule.

3. The Vest

The vesting period is when you start to take ownership of your options and the right to exercise them. Vesting can either happen all at once or take place after a cliff (as noted above), or gradually over several years, depending on your company’s plan.

One common vesting schedule is a one-year cliff followed by a four-year vest. On this timeline, you’re 0% vested the first year (meaning you aren’t eligible for any options), 25% vested at the two-year mark (you can exercise up to 25% of the total options granted), and so on until you own 100% of your options. At that point, you’re considered fully vested.

4. The Exercise

This is when you pull the financial trigger and actually purchase some or all of your vested shares.

ESO’s Expiration Date

While the expiration date of stock options isn’t always front and center, it’s important to bear in mind. The strike price you’re given as part of your options package expires on a certain date if you don’t exercise your shares.

One common timeline is 10 years from grant date to expiration date, but specific terms will be in the contract, and it’s important to vet the timing of your ESOs — as part of your career as well as your tax and your long-term financial plan. Again, if you let your stock options expire, you lose the right to buy shares at that price.

Pros and Cons of Employee Stock Options (ESOs)

If you land a job with the right company and stay until you’re fully vested, exercising your employee stock options could potentially lead to gains.

For example, if your strike price is $30 per share, and at the time of vesting the stock is trading at $100 or more per share, you’re getting a great deal on shares.

On the other hand, if your strike price is $30 per share and the company is trading at $10 per share, you might be better off not exercising your employee stock options until the price goes up (when and if it does; there are no guarantees).

That’s why ESOs are considered a form of employee incentive: You may work harder to help the company grow, if you know your efforts could translate to a higher stock price.

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Tax Implications of Employee Stock Options

Given that stock options can generate gains, it’s important to know how they are taxed so you can plan accordingly.

Generally speaking, employers offer two types of stock options: nonqualified stock options (NSOs or NQSOs) and incentive stock options (ISOs).

Nonqualified Stock Options

NSOs are the most common and often the type offered to the general workforce. NSOs have a less favorable tax treatment, because they’re subject to ordinary income tax on the difference between the exercise price and the market price at the time you exercise your options and purchase the stock, assuming the market price is higher.

NSOs are then taxed again at the capital gains rate when you sell the shares at a profit.

Your individual circumstances, tax filing status, and the terms of your stock options may also play into how you’re taxed, so you may want to consult a professional.

Incentive Stock Options

ISOs are “qualified,” meaning you don’t pay any taxes when you exercise the options — unless you’re subject to the alternative minimum tax (AMT).

You will owe taxes, however, if you sell them at a profit later on. (If you don’t sell, and if the stocks gain or lose value, those are considered unrealized gains and losses.) Any money you make when you sell your shares later would be subject to capital gains tax. If you hold your shares less than a year, the short-term capital gains tax rate equals your ordinary income tax rate, which could be up to 37% for the highest tax bracket.

If you hold your shares less than a year, the short-term capital gains tax rate equals your ordinary income tax rate, which could be up to 37% for the highest tax bracket.
For assets held longer than a year, the long-term rate is lower: 0%, 15%, or 20%, depending on your taxable income and filing status.

What Are Restricted Stock Units (RSUs)?

Restricted stock units, or RSUs, simply grant employees a certain number of shares stock by a certain date. When employees are granted RSUs, the company holds onto the shares until they’re fully vested.

The company determines the vesting criteria — it can be a time period of several years, a key revenue milestone, and/or personal performance goals. Like ESOs, RSUs can vest gradually or all at once. When the employee gets their shares, they own them outright; employees don’t have to buy RSUs.

How Do Restricted Stock Units (RSUs) Work?

RSUs are priced based on the fair market value of the stock on the day they vest, or the settlement date. The company stocks you receive from your company will be worth just as much as they would be if you purchased them on your own that same day.

If the stock is worth $40 per share, and you have 100 shares, you would get $4,000 worth of shares (assuming you’re fully vested and have met other terms).

Again, the main difference between employee stock options and restricted stock units is that you don’t have to purchase RSUs.

As long as the company’s common stock holds value, so do your RSUs. Upon vesting, you can either keep your RSUs in the form of actual shares, or sell them immediately to take the cash equivalent. Either way, the RSUs you receive will be taxed as income.

And, of course, if you later sell your shares you may realize a gain or a loss and there will be tax implications accordingly.

Pros and Cons of Restricted Stock Units (RSUs)

One good thing about RSUs, similar to ESOs, is the incentive to stay with the company for a longer period of time. If your company grows during your vesting period, you could see a substantial windfall when your settlement date rolls around.

But even if the stock falls to a penny per share, the shares are still awarded to you on your settlement date. Since you don’t have to pay for them, it’s still money in your pocket.

In fact, you may only lose out on money with RSUs if you leave the company and have to forfeit any units that aren’t already vested, or if the company goes out of business.

Tax Implications of RSUs

When your RSU shares or cash equivalent are automatically delivered to you on your settlement date(s), they’re considered ordinary income and are taxed accordingly. In fact, your RSU distributions are actually added to your W-2 form.

For some people, the additional RSU income may bump them up a tax bracket (or two). In those cases, if you’ve been withholding at a lower tax bracket before your vesting period, you could owe the IRS more money.

As with ESOs, if you sell your shares at a later date and make a profit, you’ll be subject to capital gains taxes.

The Takeaway

Employee stock options (ESOs) and restricted stock units (RSUs) are two different types of equity or share-based compensation.

An employee stock option gives an employee the option to buy company stock at a certain price, by a certain date. An RSU is the promise that on a future date the employee will receive actual company stock (without having to purchase the shares).

Because these types of compensation are often considered incentives, they’re designed to encourage employees to stay with the company for a certain amount of time. As such, employees often don’t get their options (in the case of ESOs) or the actual shares (in the case of RSUs) until certain terms are met. There may be a vesting schedule or company benchmarks or other terms.

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