Guide to self-employed taxes: How to calculate and file

Running your own business offers more control over your work and income, but in the United States it also means extra tax obligations. Unlike traditional employment, where the employer handles withholdings and you just have to send in a yearly return, as a self-employed individual you have more taxes to calculate and forms to file.

In this guide, we’ll explore how self-employed taxes work and explain how to make sure you’re managing them correctly.

What are self-employment taxes?

Self-employment taxes cover Social Security and Medicare contributions for individuals who freelance or own their own businesses. When you work for a company, your employer pays half of these taxes and deducts the rest automatically. But when you’re self-employed, you play the roles of both employer and employee, so you’re responsible for the entire tax obligation.

So how much is the extra tax for self-employed workers? The current federal self-employment tax rate is 15.3% of your net income – this number combines 12.4% for Social Security tax and 2.9% for Medicare tax. In addition, you’ll still pay the same federal and state income taxes you would as an employee, plus any relevant local taxes.

Who pays self-employment taxes?

Anyone who earns income independently is responsible for self-employment taxes. Here are three common examples.

Independent contractors

Independent contractors (also called freelancers) perform services for clients under a contract or verbal agreement, but are not full employees. While arrangements vary, contractors typically receive few or no benefits beyond pay, and they have more control over when and how they complete work.

If you’re a contractor, each client or business you work for may submit IRS Form 1099-NEC if total payments reach at least $600 during a single tax year. For tax year 2026, this threshold increases to $2,000. However, even without that form, you’ll still need to report your income and calculate self-employment taxes.

Gig workers

Gig workers are contractors who earn income through short-term tasks or service platforms. Many gig workers drive passengers, deliver food, or complete freelance assignments for online businesses.

Some of these platforms may issue tax forms that summarize payments received during the year. But regardless, gig workers are just like any other freelancers – they must track their own earnings and report self-employment taxes regularly.

Independent business owners

Business owners who operate as sole proprietors or general partners manage their own operations, revenue, and expenses. If the business generates net earnings, those profits typically become subject to self-employment tax.

Who must file self-employment taxes?

The IRS requires taxpayers to file self-employment taxes if net earnings from non-employment positions reach $400 or more during the year. This threshold applies even if you already receive Social Security benefits or hold an employee position elsewhere.

Many self-employed individuals get 1099-NEC forms, and this helps the IRS match income reported by businesses with individual tax returns. However, the filing requirement doesn’t depend on receiving this form – if your earnings exceed the $400 limit, you must report that as self-employment income. To do so, you’ll file Schedule SE (IRS Form 1040) along with your annual tax return.

How do you calculate and file self-employment taxes?

Calculating self-employment taxes starts with determining your net business income and applying the appropriate rates. Here’s how:

• Determine your net earnings: Subtract ordinary and necessary business expenses from your total business income. The remaining amount represents your net earnings.
• Multiply net earnings by 92.35%: This adjustment reflects the deductible employer portion of self-employment tax.
• Apply Social Security tax: Multiply your adjusted earnings by 12.4% to get your Social Security tax.
• Apply Medicare tax: Multiply your adjusted earnings by 2.9% to calculate your Medicare tax.
• Add both amounts together: Add the numbers you got in Steps 3 and 4 – this gives you the amount of Social Security and Medicare tax you owe for the year.
• File Schedule SE: Use this schedule to report your calculations and final tax obligation on your return.

Social Security wage base and additional Medicare tax

The Social Security portion of self-employment tax only applies to the first $176,100 of your earnings for the 2025 tax year. Any income you earn above this limit is exempt from the 12.4% Social Security tax. Keep in mind that this threshold changes annually to reflect inflation.

Medicare works differently, as the 2.9% tax applies to all earnings from self-employment with no cap. Higher-income taxpayers may also need to pay an additional Medicare tax of 0.9% when income exceeds certain thresholds, which are currently:

• $250,000 for married couples filing jointly
• $125,000 for married taxpayers filing separately
• $200,000 for single filers

How do you pay quarterly estimated taxes?

Quarterly tax works differently for self-employed and employed workers, since employees have taxes withheld automatically from each paycheck. Self-employed individuals must instead make estimated tax payments throughout the year – waiting until April to pay everything at once may result in underpayment penalties, unless your total tax liability is minimal.

If you expect to owe at least $1,000 in taxes, you’ll file payments four times per year. To calculate your quarterly taxes, use IRS Form 1040-ES to estimate your expected income and credits for the year, then divide the total into four equal installments. If you don’t make estimated tax payments or pay too little, the IRS may charge underpayment and late penalties.

How do you file an annual return?

Just like employees, self-employed individuals usually file their annual tax returns using Form 1040. But the process generally includes several supporting IRS schedules, such as:

• Schedule C: Here you’ll report business income and expenses to calculate net earnings.
• Schedule SE: As discussed above, this is where you calculate self-employment taxes.

Once you’ve completed supplemental forms, you’ll transfer tax amounts to your Form 1040 and use them to calculate your total federal tax liability. Then you can submit your return electronically through approved tax software or with the help of a CPA.

Do you need to file an information return?

Businesses must sometimes file information returns to report payments made to third-party individuals or entities. These filings help the IRS track taxable income across taxpayers. A common example is Form 1099-NEC, which businesses use to report payments over the annual threshold to independent contractors.

Businesses typically send information returns to both the contractor and the IRS. As a contractor, you won't need to send this form unless you employ other freelancers, but you should use it when preparing your tax return. Just make sure that what the information return reports is accurate and lines up with your own records, and contact the relevant business about any discrepancies.

What are the common tax deductions for self-employed individuals?

Running a business creates expenses employees rarely encounter, and many of these costs qualify as deductions that can reduce your taxable income. If you’re a self-employed worker, you may be able to deduct these expenses.

Home office

If you use a portion of your home exclusively and regularly for business, you might qualify for work-from-home tax deductions. You can use a simplified method that multiplies $5 per square foot of business-only space (up to 300 square feet). Or you can calculate the percentage of your home used for business and deduct that portion of actual expenses like rent, mortgage interest, utilities, and insurance.

Retirement contributions

Self-employed individuals can contribute to tax-advantaged retirement plans such as:

• SEP IRAs
• SIMPLE IRAs
• Solo 401(k)s

Depending on the plan type, you can deduct some or all of your contributions when filing federal taxes. This is a crucial way to build retirement savings while lowering your tax obligations.

Business travel and meals

Travel expenses may qualify as deductions when the trip relates directly to business activity, and they can include transportation, lodging, and some meal costs. If you want to use these expenses as deductions, you’ll have to keep detailed records and receipts.

Health insurance premiums

Self-employed individuals must typically pay for their own health insurance, so they can deduct premiums for themselves, plus their spouse and dependents if relevant. This deduction applies to medical, dental, and long-term care insurance.

How can you avoid self-employed tax penalties?

If you underpay self-employment taxes or submit incorrect information, you can end up owing significant penalties. To avoid that, you should:

• Keep personal and business accounts separate: Open a dedicated bank account for business activity, since distinct accounts create a clear paper trail for the IRS and help you identify deductible expenses.
• Save all receipts for business expenses: Documentation supports deductions during IRS audits, so save or digitally store every receipt as soon as you receive it. Many accounting tools allow users to save uploaded receipts alongside expense entries.
• Track income diligently: Use accounting software to monitor your cash flow every month – this way, you know how much you typically earn and can make more accurate estimates.
• Make your quarterly estimated tax payments on time: Quarterly payments reduce the chance of underpayment penalties, so file them accurately and promptly. If possible, whenever you get paid you should immediately set aside part of that income in a separate tax savings account, to ensure that you have funds available for your estimated payments.

How do crypto payments affect self-employment tax?

The IRS generally treats cryptocurrency and other digital assets as property. But when you receive crypto as payment for services, it usually counts as self-employment income instead.

You’ll need to report the fair market value of the crypto in U.S. dollars, and that figure becomes your cost basis for tax calculations. For more details on how to do this, check out our full crypto tax guide.

Tax on crypto sales

When you later sell or exchange the crypto you received as payment, you’ll trigger a second taxable event. You need to calculate and report capital gains or losses by subtracting the crypto’s original cost basis from its sale price.

If you hold the crypto for more than one year before selling, you’ll qualify for long-term capital gains rates, which are typically lower than ordinary income taxes. If you sell within a year, the profit is a short-term capital gain and is taxed at standard rates.

File your crypto taxes confidently with CoinTracker

If you receive cryptocurrency as self-employed payments, you must track every transaction for accurate reporting. However, crypto transactions can generate hundreds or thousands of individual tax events, and manually recording all of it quickly becomes difficult.

Crypto tax software like CoinTracker helps you automate this process by connecting all your exchanges and wallets and importing transactions. CoinTracker will also calculate gains, losses, and income automatically, and even generate IRS-compliant tax forms that integrate with tools like TurboTax and H&R Block.

Tax time is approaching – are you prepared? Let us simplify your crypto tax journey. Create a free CoinTracker account and let our platform handle the complexities.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.