Self-Employment Tax vs. Income Tax - What's the Difference?
Self-employed people are required to pay self-employment taxes, which help fund Social Security and Medicare. In addition, they likely have to pay income tax based on their total taxable income, including their self-employment income. While self-employed people have to pay them both, there are important differences between the two taxes.
Key Takeaways
- The self-employment tax is similar to the employment taxes employees and employers pay to fund Social Security and Medicare. However, self-employed people pay the entire tax themselves, since they’re both the employee and employer.
- Income taxes are paid on your taxable income, including income from wages, self-employment, pensions, investments, and other sources.
- There are different tax rate structures for the self-employment tax and the income tax. The self-employment tax consists of the 12.4% Social Security tax and the 2.9% Medicare tax, for a total tax rate of 15.3%. On the other hand, there are seven federal income tax rates ranging from 10% to 37%.
- Self-employed individuals typically make estimated tax payments during the year to pay both their self-employment and income taxes. These payments are similar in purpose to tax withholding from an employee's paycheck.
Self-employed people pay both self-employment taxes and income taxes
If you’re self-employed – either on a full-time basis or just as a side gig – you’ll likely have to pay federal self-employment taxes. However, the self-employment taxes you pay won’t offset the federal income tax you otherwise owe.
That’s because the two taxes are different. And if you’re self-employed, you probably have to pay both of them. But depending on your income, filing status, and other factors, the amount you owe for one or both of these taxes could be reduced – or even eliminated, in the case of the income tax.
Let’s take a closer look at both the self-employment tax and the income tax from a self-employed person’s point of view. If you’re working for yourself, it’s important to understand how these two taxes can impact your bottom line.
TurboTax Tip:
The IRS will generally treat you as a self-employed person if you’re in business for yourself (including a part-time business or as a gig worker), such as working as an independent contractor, freelancer, sole proprietor, or partner in a partnership.
What is the self-employment tax?
The self-employment tax, which is a special tax on your net earnings from self-employment, is what self-employed people pay to help fund the Social Security and Medicare programs (it’s similar to the FICA taxes on wages that are withheld from an employee’s paycheck). Net earnings from self-employment is basically your total income from self-employment minus related business expenses. For the 2024 tax year, you’re generally required to pay the tax if you have at least $400 in net self earnings.
As with FICA taxes, the self-employment tax is actually made up of two parts – the Social Security tax and the Medicare tax. The Social Security tax rate is 12.4%, while the Medicare tax rate is 2.9% – for a total self-employment tax rate of 15.3%. However, unlike FICA taxes, which are evenly split between the employer and employee (7.65% each), self-employed people have to pay the full 15.3% of the self-employment tax.
There are some provisions that lower the self-employment tax. For instance, 7.65% of your net earnings from self-employment is exempt from tax. As a result, the tax only applies to 92.35% of your net earnings (100% - 7.65% = 92.35%). This exemption is comparable to the business expense deduction allowed for the 7.65% of tax employers pay on their employees’ wages.
In addition, once the combined total of your wages, tips, and self-employment income hits a certain amount, the rest of your income is no longer subject to the Social Security tax (there is no similar cap on the Medicare tax). For the 2024 tax year, the threshold – known as the Social Security wage base – is $168,600 ($176,100 for 2025).
The self-employment tax you owe is added to your federal income tax when you file your annual 1040 form (use Schedule SE to calculate your self-employment tax). However, if you’re making “quarterly” estimated tax payments during the tax year – which most self-employed people do – a portion of each payment should cover part of your self-employment tax for the year. As a result, once all your quarterly payments are taken into account, the overall increase in your federal income tax bill attributed to the self-employment tax will have already been paid – or at least most of it should. (Quarterly estimated tax payments are discussed further below.)
What if you have both wages from an employer and self-employment income?
If you have both wages from an employer and self-employment income, the Social Security tax on your wages is paid first. If the combined total of your self-employment income and wages is greater than the Social Security wage base for the year, this can help lower the amount of self-employment tax you owe.
For example, suppose you have $100,000 in wages from an employer and $69,600 in self-employment income from a side gig in 2024, for a combined total of $169,600. The Social Security tax that’s part of the FICA tax is paid on the full $100,000 of wages (half is withheld from your paycheck and your employer pays the other half). However, since Social Security taxes for the 2024 tax year are only imposed on the first $168,600 of your combined wages and self-employment income, you’ll only pay the Social Security tax that’s part of the self-employment tax on $68,600 of your self-employment income ($168,600 - $100,000 = $68,600). The remaining $1,000 of self-employment income isn’t subject to the Social Security tax, since that’s the amount of the combined total in excess of the 2024 Social Security wage base ($169,600 - $168,600 = $1,000). You’ll still have to pay a 2.9% tax on that remaining $1,000 since there’s no limit on the amount of employment income subject to the Medicare tax.
Deduction for half of self-employment tax
When calculating your federal income tax for the year, you can deduct 50% of your self-employment tax for the year. This deduction only affects your income tax. It doesn’t affect either your net earnings from self-employment or the amount of self-employment tax you owe.
The deduction is calculated on Schedule SE and then reported on Schedule 1 (Form 1040).
Additional Medicare tax
Higher-income self-employed people can be hit with an additional 0.9% Medicare tax. Although they’re related, this tax is separate from the Medicare tax that’s part of the self-employment tax (or the FICA tax).
The additional tax generally applies if your wages, self-employment income, or railroad retirement compensation exceeds:
- $250,000 for married couples filing a joint return
- $125,000 for married people filing a separate return
- $200,000 for everyone else
Form 8959 is used to calculate the additional Medicare tax.
What is the income tax?
As the name suggests, the federal personal income tax is a tax on income you receive during the year. Income can be in the form of money, property, goods, or services. You’re generally required to file a federal income tax return and pay any tax due if you have gross income exceeding your Standard Deduction for the year.
Most income is taxable, unless it’s specifically exempted by law. Taxable income can include wages, pensions, Social Security benefits, tips, bonuses, capital gains, business profits (including from self-employment), canceled debt, gambling winnings, prizes, court awards, and more. (IRS Publication 525 discusses many different types of income and explains whether they’re taxable or nontaxable.)
However, before calculating the income tax you owe, you can subtract any tax deductions you qualify for from your total income – including either the Standard Deduction or itemized deductions – to arrive at your taxable income.
Once you’ve calculated your taxable income, the federal income tax rates are applied to that amount to figure your income tax liability for the year. The U.S. uses marginal tax rates to calculate the amount of income tax you owe. The current rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37% (more on how the marginal rates work in a minute). The rates are also applied progressively, meaning that your marginal tax rate increases as your taxable income rises.
Your income tax liability is then reduced by any tax credits you can claim. Any taxes you’ve already paid for the year – such as through withholding or estimated tax payments – are also subtracted from your tax liability. If your tax payments and available credits are greater than your tax liability, then you’ll receive a tax refund. Otherwise, you have to pay the balance due with your tax return.
How the marginal tax rates work
Your “marginal tax rate” is the tax rate applied to the last dollar of your taxable income. In other words, it’s the highest tax rate that applies to your income. Your marginal tax rate is the rate that’s tied to your tax bracket, which is based on your filing status and taxable income.
However, unless you’re in the lowest tax bracket (10%), all of your taxable income isn’t taxed at your marginal rate. Some of it will be taxed at lower rates. That’s because income falling within each bracket is taxed at the rate for that bracket.
For example, if you’re single and have $50,000 of taxable income for the 2024 tax year, you’ll be in the 22% tax bracket. So, your marginal tax rate is 22%. However, your tax isn’t 22% of $50,000 (or $11,000). Instead, your tax for the year is based on the tax due on the amount of your taxable income that falls into each tax bracket. This would include 10% of the first $11,600 of taxable income (or $1,160), plus 12% of taxable income from $11,601 to $47,150 (or $4,266), plus 22% of taxable income from $47,151 to $50,000 (or $627). This comes to $6,053 in tax ($1,160 + $4,266 + $627 = $6,053), which is $4,947 less than simply applying the 22% rate to all your taxable income ($11,000 - $6,053 = $4,947).
Quarterly tax payments
Federal income taxes are due on a “pay as you go” basis. As a result, if you owe a certain amount of tax for the year, you need to make estimated tax payments throughout the year instead of paying all the tax you owe when you file your tax return.
Taxpayers need to make estimated tax payments if they don’t have enough money sent to the IRS during the year by other means – such as through withholding from their paycheck or other sources of income – to cover what they will owe in taxes for the year. This is usually the case for self-employed people, since they don’t typically have taxes withheld from their self-employment income.
The estimated tax payments are often referred to as “quarterly” tax payments because they’re due four times per year – that is, roughly (but not exactly) every calendar quarter.
Failing to make sufficient quarterly payments throughout the year can result in IRS interest and penalties on an underpayment when you prepare and file your tax return.
State income taxes
In addition to the federal income tax, most states also impose their own state income tax. There are only nine states with no income tax. Some local governments – such as cities and counties – impose an income tax, too.
In most cases, your state’s income tax return will look similar to your federal return. However, there will be some important differences, such as different tax rates, deductions, and credits. Plus, the calculation of your state income tax liability typically starts with either your federal adjusted gross income or federal taxable income. So, you generally need to complete your federal tax return before working on your state return.
You can generally deduct your state and local income and property taxes on your federal tax return. However, the deduction for all state and local taxes is limited to $10,000 per year, and you have to itemize in order to claim it. If you pay more in state and local sales taxes during the year, or you live in a state without an income tax, you can deduct your sales taxes instead of your state and local income taxes.
Differences between self-employment tax and income tax
While both self-employment taxes and federal income taxes are collected by the U.S. government, they are different in many ways that are important to self-employed people. Let’s highlight some of the key differences.
Who pays the tax
- The self-employment tax is paid by people who work for themselves, such as freelancers, independent contractors, and other sole proprietors.
- Federal income tax is generally paid by anyone who earns income, regardless of whether they’re self-employed or work for someone else.
Purpose of the tax
- The self-employment tax is specifically for self-employed people to help fund the federal Social Security and Medicare programs.
- Federal income taxes are used to fund various government programs and services.
Income subject to tax
- The self-employment tax only applies to 92.35% of net earnings from self-employment.
- Federal income tax applies to various types of income, including wages, salaries, tips, self-employment income, interest, dividends, certain retirement plan distributions, and more.
Tax rates
- The self-employment tax rate is 15.3%.
- Federal income tax rates range from 10% to 37%, depending on your taxable income level.
Tax deductions
- Self-employed people can deduct certain business expenses from their self-employment income before calculating the self-employment tax.
- There’s a wide variety of federal income tax deductions available, including a deduction for 50% of your self-employment tax. Some deductions are only available if you claim itemized deductions instead of the Standard Deduction.
Tax credits
- There are no tax credits applied to the self-employment tax.
- There’s a wide variety of federal income tax credits available.
Payment schedule
- The self-employment tax is typically paid throughout the year with estimated tax payments.
- For most people, federal income tax is usually paid through withholding from paychecks or in one lump sum when filing their annual tax return. However, self-employed people typically pay income taxes (along with their self-employment tax) during the year by making estimated tax payments.
State taxes
- States don’t impose self-employment taxes comparable to the federal Social Security and Medicare taxes.
- Most states have their own personal income tax.
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