Self-Employment Tax: Who Needs to Pay and Why it Matters
Taxes aren’t exactly thrilling, but they're a crucial part of your business success. And if you have questions, you’re not alone — many business owners struggle with self-employment tax. Whether you're just starting out or have been managing your books for a while, understanding this tax is essential for your financial health. Read on for a rundown of what you need to know.
What exactly is self-employment tax?
Self-employment tax is your contribution to Social Security and Medicare — it's currently 15.3% of your income. When you work for someone else, your employer splits this cost with you. But when you're self-employed, you're covering the whole amount yourself. That breaks down to 12.4% for Social Security (but only on the first $160,200 of your earnings as of 2023) and 2.9% for Medicare.
Remember, while it might feel like a big chunk of change, you're investing in your future retirement and healthcare benefits.
Who needs to pay self-employment tax?
You'll need to pay self-employment tax if you're:
A solo business owner running an unincorporated business.
A freelancer or independent contractor doing gig work, writing, design, or other services.
Part of a business partnership.
If you earn $400 or more in net self-employment income during the year, you're on the hook for self-employment tax.
Who gets a pass?
Not everyone has to pay self-employment tax. You might be exempt if you're:
An S corporation officer who takes a reasonable salary (different rules apply to your dividends).
A member of certain religious groups that opt out of Social Security benefits.
A qualifying non-resident alien under specific IRS rules.
Smart ways to reduce your tax bill
While you can't avoid self-employment tax entirely, you can minimize it:
Track your business expenses — every deductible expense reduces your taxable income.
Look into forming an S corporation — it could save you money on taxes in the long run, especially as you make more money.
Contribute to a retirement plan — not only are you saving for the future, but you're reducing your current tax bill.
Special situations to keep in mind
If you’ve been running a business for a while you know that taxes are never simple or straightforward. Here are some special cases that make things more complicated:
Running multiple businesses? You'll need to combine all your earnings to calculate your tax.
Have a day job plus a side gig? You'll owe self-employment tax on your side income even though you’re also paying taxes on your other income.
Earning rental income or dividends? Good news — these usually aren't subject to self-employment tax.
Self-employment tax is part of doing business, and understanding it helps you plan better and keep more of your hard-earned money. While this guide covers the basics, every business situation is unique. If you're feeling overwhelmed or want to make sure you're not leaving money on the table, the team at Archer Lewis is here to help. We can get tax hassles off your plate while keeping your business goals front and center.