Self-employed people pay into Social Security through self-employment tax, which is separate from income tax
Yes, self-employed workers pay into Social Security. The difference is how the payment happens. When you work for an employer, your employer withholds half of your Social Security tax from your paycheck and pays the other half themselves. When you are self-employed, you pay both halves yourself through self-employment tax, reported on Schedule SE of your tax return.
Self-employment tax covers both Social Security and Medicare. For 2024, the self-employment tax rate is 15.3 percent of your net earnings — 12.4 percent for Social Security and 2.9 percent for Medicare. You calculate this on your annual tax return, not through payroll withholding. The Social Security portion stops once your earnings reach a certain cap each year (which changes annually), but the Medicare portion continues on all earnings above that cap.
The earnings you report to Social Security are your net business income after business expenses, not your gross revenue. This means you subtract what you spent to run your business before calculating what you owe.
Key Takeaways
- Self-employed workers pay 12.4 percent of net earnings into Social Security, compared to 6.2 percent paid by employees whose employers match the other half.
- You report self-employment tax on Schedule SE when you file your annual income tax return, not through payroll withholding.
- Only net business income (after business expenses) counts toward Social Security, so keeping records of what you spent is important.
- The Social Security portion of self-employment tax applies only to earnings up to an annual cap, which the government adjusts each year.
- Years with no self-employment income or very low income still count toward your work history, but they do not add to your earnings record.
How self-employment tax is calculated and reported
You report self-employment tax on Schedule SE, which is part of your Form 1040 tax return. The form asks for your net profit from self-employment, which comes from Schedule C (if you are a sole proprietor) or Schedule K-1 (if you are a partner or S-corporation owner). The IRS provides worksheets on Schedule SE to walk you through the calculation.
The calculation has two steps. First, you take your net business income and multiply it by 92.35 percent — this accounts for the fact that you can deduct half of your self-employment tax as a business expense. Then you multiply that result by 15.3 percent to get your total self-employment tax. You owe this amount when you file your return, though you can make quarterly estimated tax payments throughout the year to avoid a large bill in April.
If you have both W-2 wages from an employer and self-employment income, the calculation is slightly different. Any Social Security tax you already paid through W-2 withholding counts toward your annual cap, so you do not pay twice on the same earnings.
What counts as self-employment income for Social Security
Social Security counts net earnings from self-employment — that is, what you made after business expenses. If you run a consulting business and earned $60,000 in fees but spent $15,000 on office rent, software, and equipment, your net earnings are $45,000. That $45,000 is what Social Security records, not the $60,000 gross.
Some types of income do not count as self-employment income. Rental income from real estate, investment income like dividends or capital gains, and income from activities that are not a trade or business do not require self-employment tax. However, if you actively manage rental properties as a business (not just collect rent passively), that income may count.
If you have a loss in a year — you spent more than you earned — you still file Schedule SE, but you report zero self-employment tax. That year still counts toward your work history for Social Security purposes, though it does not add earnings to your record.
The annual earnings cap and how it affects your payments
Social Security has an annual cap on earnings that count toward the tax. For 2024, that cap is $168,600 — meaning you pay the 12.4 percent Social Security tax only on earnings up to that amount. Once you reach the cap, you stop paying the Social Security portion of self-employment tax for the rest of that year, though you continue paying the 2.9 percent Medicare tax on all earnings.
The cap changes each year based on national wage trends. The Social Security Administration announces the new cap in October for the following year. If you are self-employed and expect to earn above the cap, you do not need to do anything — the calculation on Schedule SE handles it automatically.
If you have both W-2 wages and self-employment income, any Social Security tax withheld from your W-2 wages counts toward the cap. For example, if you earned $150,000 as an employee and $30,000 from self-employment, you would have already paid the Social Security tax cap through your W-2 withholding, so you would owe no additional Social Security self-employment tax on the $30,000.
How self-employment income affects your Social Security record
Every dollar of net self-employment income you report goes into your individual Social Security earnings record. Social Security uses your highest 35 years of earnings to calculate your retirement benefit amount. If you have years with low or no self-employment income, those years still count in the calculation, which can lower your average.
The earnings record is also what determines whether you have worked long enough to receive benefits. You need 40 credits to receive retirement benefits, and you earn one credit for each $1,730 of earnings in 2024 (the credit amount changes yearly). Self-employed workers can earn up to four credits per year, so you could reach 40 credits in as few as 10 years of self-employment.
You can view your earnings record online through your personal my Social Security account at ssa.gov. The record shows what Social Security has on file for each year. If you see an error — a year where you earned money but it is not showing, or an amount that is wrong — you can contact Social Security to correct it, though you will need tax returns or other records to prove the earnings.
What happens if you do not pay self-employment tax
Self-employment tax is a legal requirement, not optional. If you do not report self-employment income and pay the tax owed, you face penalties and interest on the unpaid amount. The IRS can also audit your return and assess back taxes going back several years.
Beyond the tax penalty, not reporting earnings means those years do not count toward your Social Security record. If you later need to prove you worked enough years to receive benefits, missing years could delay or reduce your benefit amount. If you are caught years later, you may be able to file amended returns, but the process is complicated and expensive.
If you have not been reporting self-employment income, you can file amended returns for the past three years without triggering an automatic audit in most cases. A tax professional or accountant can help you decide whether to file amendments and how to handle the situation with the IRS.
Frequently Asked Questions
Can I deduct half of my self-employment tax from my income taxes?
Yes. You can deduct half of your self-employment tax as a business expense on your Form 1040, which reduces your taxable income. This deduction is built into the Schedule SE calculation, so you do not have to do anything extra — it happens automatically when you file.
What if I have very low self-employment income one year?
You still report it on Schedule SE and pay the self-employment tax owed, even if the amount is small. That year counts toward your 40 credits needed for Social Security benefits. If your income is below the threshold for filing a tax return, you may not be required to file, but filing anyway can help build your Social Security record.
Do I need to make quarterly estimated tax payments?
You should make quarterly estimated payments if you expect to owe $1,000 or more in taxes for the year. These payments are due April 15, June 15, September 15, and January 15. The IRS provides Form 1040-ES to help you calculate what to pay each quarter.
What if I am incorporated as an S-corporation — do I still pay self-employment tax?
S-corporation owners pay themselves a reasonable salary as a W-2 employee, which is subject to payroll taxes like any other employee. Profits beyond that salary are distributed as dividends, which are not subject to self-employment tax. This structure can lower your self-employment tax, but the IRS watches to make sure the salary is genuinely reasonable for the work done.
How do I report self-employment income if I use a tax software or accountant?
If you use tax software, you enter your net business income from Schedule C, and the software calculates Schedule SE automatically. If you work with an accountant or tax preparer, give them your business income and expenses, and they will handle the self-employment tax calculation as part of preparing your return.