Self-employment tax is the Social Security and Medicare tax that self-employed individuals pay on their net earnings. Unlike W-2 employees who split FICA taxes 50/50 with their employer, freelancers and independent contractors are responsible for both the employee and employer portions — a combined 15.3% (12.4% Social Security + 2.9% Medicare). The tax is calculated on 92.35% of your net self-employment earnings, and you can deduct half of it when calculating your adjusted gross income, which provides some relief on your income tax.
Because self-employed individuals don't have taxes withheld from their income, the IRS requires quarterly estimated tax payments throughout the year. These payments cover both self-employment tax and income tax. The four deadlines are April 15, June 15, September 15, and January 15 of the following year. Failing to make adequate quarterly payments can result in underpayment penalties, even if you pay the full amount when filing your return. To avoid penalties, you must pay at least 90% of your current year's tax liability or 100% of your prior year's tax (110% if your AGI exceeds $150,000).
Smart tax planning can significantly reduce your self-employment tax burden. Maximize business expense deductions to lower your net income — including home office, vehicle expenses, health insurance, and professional development. Contributing to a SEP-IRA (up to 25% of net earnings, max $69,000) or Solo 401(k) reduces your taxable income while building retirement savings. Consider the QBI deduction, which can reduce your taxable income by up to 20% of qualified business income. For higher earners, forming an S-Corporation can reduce SE tax by paying yourself a reasonable salary and taking the rest as distributions, which aren't subject to self-employment tax.