Self-Employment Tax Explained

SE tax covers two federal programs:

• Social Security: 12.4% (on income up to $168,600 in 2024)
• Medicare: 2.9% (no income cap)

Combined, that's 15.3%. When you're a W-2 employee, your employer pays half of this out of their pocket, and you pay the other half via your paycheck (the line items labeled FICA). When you're self-employed, you pay both halves yourself. That's why it's 15.3% — it's literally double what a regular employee pays out of pocket.

SE tax is completely separate from federal income tax. You owe both. This is the single most common freelancer tax surprise.

The formula is:

SE tax = Net profit × 92.35% × 15.3%

The 92.35% adjustment exists because the IRS lets you ignore the portion of your income that would have gone to the "employer half" of FICA if you were on a W-2.

A worked example with $80,000 in net profit:

Net profit:    $80,000
× 92.35%:      $73,880
× 15.3%:       $11,304
SE tax owed:   $11,304

That's on top of federal income tax and any state income tax. Budget accordingly.

You can deduct 50% of your SE tax from your gross income when calculating federal income tax. It doesn't reduce the SE tax itself — you still owe the full 15.3% — but it lowers your federal taxable income, which lowers your federal income tax bill.

In the $80,000 example above, you'd deduct roughly $5,652 from your gross income before calculating federal income tax. At a 22% marginal rate, that saves you about $1,243 in federal tax.

SE tax is calculated on your net profit, so anything that reduces net profit reduces SE tax. That means every legitimate business deduction saves you not just income tax, but SE tax too.

• Maximize business deductions — home office, mileage, software, equipment. A $1,000 deduction saves you roughly $153 in SE tax alone.
• Contribute to a SEP-IRA — up to 25% of net earnings, reducing taxable income (though not net profit for SE tax purposes, it still reduces income tax).
• Consider an S-Corp election at higher income levels — an S-Corp lets you split income between "reasonable salary" (subject to SE tax) and "distributions" (not subject to SE tax). Talk to a CPA before going this route; it adds complexity and payroll obligations.

Every time you log an invoice or a deduction in TaxClutch, the app recalculates your net profit, applies the 92.35% × 15.3% formula, and adds it to your running tax liability. You see your SE tax number, your federal tax number, and your state tax number — all on one dashboard, updated in real time.