A big part of the appeal of running your own business is being your own boss. However, while the flexibility of setting your own hours and reaping all of the profits is enticing, you must also realize that there is one substantial string attached: self-employment taxes. If you’re used to working a 9-5 and having taxes taken out automatically, this switch can come as a big surprise when tax season hits.
So, to help you prepare for this inevitable aspect of being an entrepreneur, let’s break down self-employment taxes. Keep in mind, though, that your tax situation may differ from the standard, so it’s always best to consult a professional accountant or tax preparer. This guide will look at the basics of these taxes, including potential ways to reduce your burden through write-offs.
What is self-employment tax?
The self-employment (SE) tax is a separate tax that covers Social Security and Medicare contributions. As of 2026, the SE tax rate is 15.3 percent, with 12.4 percent going to Social Security and 2.9 percent going to Medicare.
As a self-employed person, you’re responsible for covering the total amount of this tax, while employees of a business typically split the cost with their employer.
Because the self employment tax is separate from income tax, you’re allowed to deduct half of this amount (the employer’s portion) from your adjusted gross income (AGI). This can help lower your income tax burden and help offset the total amount you owe to the IRS.
Who has to pay self-employment tax?
Generally, anyone who earns income that doesn’t include tax withdrawals must pay this tax. This includes:
- Sole proprietors
- Single-member LLCs (that are taxed as sole proprietors)
- Independent contractors
- Freelancers
In some cases, partnership members may also have to pay the self employment tax. Again, it’s best to discuss your specific tax situation with a professional to determine whether you must pay and how much you owe.
Typically, if you operate a corporation (either a C Corp or an S Corp), your income generally has taxes withdrawn through a W-2, so you’re not liable for the self employment tax.
According to the IRS, the threshold for self-employment income is $400, so if you happen to make less than that in a calendar year, you don’t have to pay anything. You may also owe an additional 0.9 percent Medicare tax if your income exceeds $200,000 as an individual or $250,000 if you’re married and filing jointly.
What percent of taxes do you pay for self-employment?
As a self-employed worker, your tax obligation is much higher than that of a traditional W2 employee. Typically, the taxes you owe include:
- Self-Employment Tax
- Income Tax
- State Taxes (depending on location)
Generally speaking, your total effective tax rate may be around 25 to 30 percent, so it’s always a good idea to set aside that amount of your earnings to satisfy your tax burden. But if you live in a state without income tax, like Florida, your total effective tax rate will be lower. You can also adjust your taxable income through deductions and business expenses, which we’ll discuss later.
Is self-employment tax in addition to income tax?
One of the biggest shocks entrepreneurs and self-employed individuals discover is that they owe more money than just income taxes. As we mentioned, contributions to Social Security and Medicare are often split between employers and employees, and the amount is deducted from your paycheck automatically.
As a self-employed worker, you have to pay both halves. Although again, you’re able to deduct the employer half from your adjusted gross income to help lower your income taxes.
Additionally, you will have to pay the self-employment tax quarterly instead of annually. In this case, you must make estimated payments based on previous tax returns. Then, once you file your taxes, if you overpaid, you can request a refund or put the overage toward future estimated payments.
It’s important to note that you shouldn’t plan to make a full payment at the end of the tax year. The IRS expects quarterly payments and may charge penalties or interest if you don’t follow the quarterly schedule.
Self-employment tax deductions
Because your tax burden is much higher as a self-employed worker, you want to take advantage of deductions as much as possible. These will lower your total earnings for the year, helping to lower both the self-employment tax and your income tax. Common business tax write offs include:
- Home Office Expenses – If you work from home, you can deduct a portion of your expenses, including homeowners’ insurance, mortgage payments, maintenance and renovations, and utility costs. Even if you’re renting an apartment, you can still deduct a portion of that cost.
- Office Rentals – If you rent an office space for your business, you can deduct part of the rental amount. Or, if you own an office, you can deduct expenses like utilities, maintenance, and leases.
- Health Insurance – If you pay for your own health insurance, you can deduct the total amount you paid for your premiums.
- Retirement Accounts – You can deduct your contributions to retirement accounts like solo 401ks or traditional IRAs. Since Roth IRAs work differently, you can’t deduct those contributions.
- Various Business Expenses – As a self-employed worker or small business owner, you can deduct a portion of expenses like meals, travel costs, transportation costs (e.g., driving your car for work), education costs, subscriptions, marketing costs, and more.
- Business Insurance – You’ll likely need some form of business insurance to protect your investment, and you can deduct the cost of those premiums.
- Cost of Goods Sold – If you sell products and maintain inventory, you can deduct the amount you spent on these goods as long as you maintain standard inventory practices.
- Employee Wages – If you hire employees for your business, you can deduct their wages from your total business earnings.
Working with a professional tax preparer can help you identify and calculate more deductions. Keep in mind that these will reduce your total business earnings and income, rather than canceling out portions of your tax burden. For example, if you earned $100,000 for the year and were able to deduct $30,000 in expenses, your tax is based on $70,000 in earnings.
Also, it’s imperative to have written records of each expense, such as receipts, invoices, pay stubs, or pertinent tax forms. For example, you’ll receive a form for your health insurance payments to verify how much you paid in premiums for the year.
How self-employed individuals calculate taxes
The best way to stay on top of the self employment tax is by recording business expenses and earnings throughout the year. Softwares can be helpful to organize these details in a single dashboard, and you can even create reports to file with the IRS.
It’s also helpful to estimate your quarterly tax payments using your previous years’ tax returns. If you expect to pay more this year, you can increase the quarterly payments accordingly.
Realistically, as a self-employed individual, you’ll likely owe money at the end of the tax year (unless you intentionally overpay). Tax calculators can help you determine more precise payments, so you’re not hit with a massive lump sum. But when in doubt, work with a professional accountant or tax preparer to ensure you don’t make any mistakes or miss out on any deductions.
Self-employment tax calculator tools
Rather than calculating these totals yourself, you can leverage self-employment tax calculator tools to simplify the process and ensure a more accurate assessment. While these tools are only meant as a guideline, they can help you:
- Estimate quarterly payments
- Avoid large end-of-year lump sums
- Manage your cash flow
As you use these tools more and more, you can get better at inputting accurate numbers based on deductions, earnings, and other factors.
Common mistakes self-employed business owners make with taxes
Because taxes are an integral part of running a small business, making mistakes could not only hurt your bottom line but also interrupt your cash flow and put your company in dire straits. Common mistakes to avoid include:
- Not Setting Money Aside – As we mentioned, your total effective tax rate could be as high as 30 percent. Not saving this money could force you to pay a massive lump sum at the end of the year. If you can’t pay it immediately, you’ll incur penalties and interest.
- Mixing Business and Personal Finances – Since the self-employment tax is separate from income tax, it’s imperative to know how much both you and your business made. When your finances are mixed, it’s much harder to calculate your totals.
- Forgetting or Missing Quarterly Payments – The IRS expects you to pay quarterly and charges penalties or interest if you miss the deadline.
- Disorganized Bookkeeping – The more detailed your financial records, the easier it is to calculate your taxes and manage deductions. Otherwise, you could spend a lot more time (or a lot more money for an accountant) sifting through these details later on.
- Missing Deductions – Working with a professional can help you identify potential deductions to reduce your overall tax burden. In some cases, the amount you pay for an accountant can be offset entirely by the money saved.
Overall, as long as you run your business or manage your earnings with the self employment tax in mind, you shouldn’t be blindsided by it when tax season rolls around.
How business structure affects self-employment tax
One crucial decision you’ll make when starting your business is how to structure it. Generally speaking, sole proprietorships and most single-member LLCs must pay the self-employment tax. Corporations, though, are treated as separate entities, so you earn income as an employee, meaning taxes should be deducted from your paycheck.
In some cases, you may be able to create an LLC and structure it like an S-corporation with pass-through income and avoid the self employment tax. However, don’t use taxes as the primary factor when deciding how to structure your business. Each option has its advantages and disadvantages, and taxes are just one aspect to consider.
Preparing your business before tax season
The more you prepare yourself and your business ahead of time, the less stress and hassle you’ll have to endure during tax season. Here are some tips to get started.
- Get a Separate Business Bank Account – Separate accounts make it easier to track business and personal income and expenses.
- Obtain an EIN – Even if you don’t plan to hire employees immediately, an EIN helps separate your business entity from your personal Social Security Number. You will also likely need an EIN to open a business account.
- Track Expenses – Keep receipts, invoices, and other documents related to your business expenses and enter them into a spreadsheet or accounting software regularly. Also, don’t forget to save hard copies, just in case.
- Be Consistent With Bookkeeping – Ideally, you can balance your books monthly or weekly to stay on top of everything.
Additionally, it can make sense to rely on outside help to manage your taxes and bookkeeping. Tailor Brands can be a valuable resource for small business owners, as we can help you form your company, organize records, and manage basic finances in a single place. These tools make it easier for you to run your business, but always consult with a tax preparer or licensed accountant for specific advice or recommendations.
Conclusion
Starting a business and working independently comes with many perks, but you must also pay attention to your taxes. Knowing about the self-employment tax means you can prepare for it by maintaining detailed records, making quarterly payments, and looking for as many deduction opportunities as possible.
In the beginning, you may want to overestimate your tax burden so you’re not hit with an unexpected balance at the end of the year. As you learn the finer points of bookkeeping or hire professionals to assist you, you can determine more accurate payments to streamline your operations and reinforce your bottom line.