Is Self-Employment Tax Federal or State?

Everyone · Explainer · Updated October 1, 2026 · LearnLife Editorial

What is self-employment tax in plain words?

Self-employment tax is a federal tax that people who work for themselves pay to cover Social Security and Medicare contributions. When you have a traditional job, your employer withholds half of these taxes and matches that amount on your behalf. However, if you are self-employed, you are responsible for both halves, which means paying the entire amount yourself. This tax helps fund your future Social Security benefits, like retirement income or disability payments, and Medicare healthcare coverage. It is important to remember that this tax is not the same as income tax; it is specifically for these social programs.

Self-employment tax applies only to net earnings from self-employment, which means your gross income from your business minus allowable business expenses. If you do freelance work, run a small business, or earn money from gigs, you generally owe this tax. The federal government collects self-employment tax through the IRS, and it is reported annually when you file your federal tax return. Understanding this tax helps you plan your finances and avoid surprises.

How does self-employment tax work?

To determine how much self-employment tax you owe, you first calculate your net profit from your self-employment activities. For example, say you run an online tutoring service and earn $5,000 in a quarter. After deducting $1,000 in expenses (like supplies, internet, and advertising), your net earnings are $4,000. You then apply the self-employment tax rate, which is approximately 15.3%. This rate breaks down into 12.4% for Social Security tax and 2.9% for Medicare tax.

Here’s a simplified way to calculate it:

1. Calculate your net self-employment income: $5,000 – $1,000 = $4,000
2. Multiply by 92.35% (this adjustment accounts for the fact that only 92.35% of your net earnings are subject to self-employment tax): $4,000 × 0.9235 = $3,694
3. Multiply by 15.3% (self-employment tax rate): $3,694 × 0.153 = approximately $565.24

This $565.24 is the self-employment tax you owe for that quarter’s income. You report this amount on Schedule SE when filing your federal taxes. It’s essential to keep accurate records of income and expenses to calculate this correctly.

Why does self-employment tax matter for you?

Self-employment tax matters because it directly affects your take-home earnings and your future benefits. When you pay self-employment tax, you are contributing to your Social Security and Medicare accounts, which means you earn credits toward benefits like retirement, disability, and healthcare coverage in your later years. If you don’t pay self-employment tax, you may not qualify for these benefits.

From a financial management perspective, knowing about this tax helps you set aside the right amount of money throughout the year. Many self-employed people underestimate how much they owe and end up with a hefty tax bill at filing time. For example, if you earn $20,000 in net self-employment income annually, you can expect to pay approximately $3,060 in self-employment tax alone (using the 15.3% rate on 92.35% of income). Setting aside about 15-16% of your earnings can help you avoid surprises.

Moreover, understanding self-employment tax helps you distinguish it from income tax, which you also likely owe. Both taxes are filed together on your federal return but are calculated separately. Being aware of your self-employment tax responsibilities also helps you plan for quarterly estimated tax payments, which many self-employed individuals must make to the IRS.

How is self-employment tax different from state taxes?

Self-employment tax is a federal tax that funds Social Security and Medicare and is collected by the IRS. States do not impose a separate self-employment tax. However, this distinction often causes confusion because many states have their own income tax systems, and self-employed income is subject to those taxes just like wage income.

For example, if you live in California, you will pay state income tax on your self-employed earnings, but you will not pay an additional self-employment tax to the state government. In Texas, which has no state income tax, you will only pay federal self-employment tax and federal income tax.

It’s important to check your state’s tax department website or contact a local tax professional to understand your state’s specific requirements. Some states require quarterly estimated payments similar to the federal system. Others have different filing deadlines or methods for reporting self-employment income.

Keeping federal self-employment tax and state income tax separate helps you avoid confusion. Self-employment tax is strictly federal and covers social insurance programs. State taxes vary widely and may include income tax, sales tax, and other taxes unrelated to self-employment tax.

What terms do people often confuse with self-employment tax?

Several tax terms get mixed up with self-employment tax, so clarifying them can help you understand your tax situation better. The main terms to distinguish are:

• Federal Income Tax: This is a tax on your total income, including wages, business profits, investments, and other sources. It is separate from self-employment tax and uses a progressive rate system based on income brackets.
• State Income Tax: Many states tax income, including self-employment earnings, but the rates and rules vary by state. This is not the same as self-employment tax.
• Payroll Taxes: These include Social Security and Medicare taxes collected from employees and employers. Self-employed individuals pay both portions through self-employment tax.
• Self-Employment Tax: Specifically the federal tax on net earnings from self-employment, funding Social Security and Medicare.
• Estimated Taxes: Payments made quarterly to cover income and self-employment tax liabilities throughout the year for those who don’t have taxes withheld by an employer.

Understanding these distinctions will help you file correctly and avoid missing any required payments.

What steps should you take next if you are self-employed?

If you are newly self-employed or want to ensure you are handling self-employment tax properly, follow these steps:

1. Track your income and expenses carefully. Keep receipts and records of all business-related purchases to accurately calculate your net earnings.
2. Calculate your estimated self-employment tax quarterly. Use your net income projections to estimate how much you owe each quarter to avoid underpayment penalties.
3. Use IRS Form 1040 Schedule SE when filing your taxes. This form helps you calculate the exact self-employment tax due based on your income.
4. Make quarterly estimated tax payments. If you expect to owe more than $1,000 in self-employment tax, you should submit estimated payments using Form 1040-ES to avoid penalties.
5. Consult your state tax agency. Learn whether you need to file state income tax and make state estimated payments.
6. Consider tax deductions to reduce taxable income. Deduct expenses such as home office, mileage, equipment, and supplies to lower your net earnings and self-employment tax base.

By following these steps, you can stay ahead of your tax obligations and reduce stress at tax time.

How can you reduce the amount of self-employment tax you pay?

While self-employment tax is mandatory, there are legal ways to reduce its impact:

• Deduct business expenses: The more legitimate expenses you deduct, the lower your net income subject to self-employment tax. Common deductions include office supplies, software, marketing costs, and home office expenses.
• Use the deduction for half of your self-employment tax: When filing your federal income tax return, you can deduct 50% of your self-employment tax from your adjusted gross income, which lowers your taxable income and income tax.
• Contribute to a retirement plan: Making contributions to a SEP IRA, Solo 401(k), or other qualified plan lowers your taxable income, indirectly reducing self-employment tax owed on that income.
• Hire a tax professional: They can identify additional deductions or strategies specific to your situation.

Keep in mind that self-employment tax funds Social Security and Medicare benefits, so reducing this tax too much could impact your future benefits.

Where can you find trusted information and help about self-employment tax?

The IRS website is the primary source for official information regarding self-employment tax, including forms like Schedule SE and instructions for calculating and paying the tax. The IRS also offers free tools and publications that explain self-employment tax in detail.

Other helpful resources include tax preparation software, which often guides you step-by-step through the process, and professional tax advisors who specialize in self-employed individuals.

For a deeper understanding, articles such as How to Pay Self-Employment Tax, What Percentage Is Self-Employment Tax, and Self-Employment Tax vs Income Tax: Key Differences provide clear explanations and examples. Checking these resources can help you file correctly and avoid costly mistakes.

Frequently asked questions

Is self-employment tax the same as income tax?

No. Self-employment tax is a federal tax that covers Social Security and Medicare contributions specifically on self-employment income. Income tax is broader and applies to all income sources, using different rates and rules.

Do I pay self-employment tax to my state government?

No. Self-employment tax is only a federal tax collected by the IRS. Your state may have income tax on your earnings, but it does not charge a separate self-employment tax.

When should I make self-employment tax payments?

You pay self-employment tax annually with your tax return, but if you expect to owe $1,000 or more, you should make quarterly estimated payments to the IRS to avoid penalties.

Can I reduce self-employment tax by deducting expenses?

You can reduce your net self-employment income by deducting legitimate business expenses, which lowers the amount of income subject to self-employment tax.

What if my self-employment income is very low?

If your net self-employment income is below the IRS threshold (check the current figure), you may not owe self-employment tax, but you still need to report your income on your tax return.

How do I calculate self-employment tax on my own?

Calculate your net earnings, multiply by 92.35%, then multiply by 15.3%. Using IRS Schedule SE or tax software is recommended for accuracy.