Table of Contents
- How much is self-employment tax?
- Do I need to pay self-employment tax?
- How can I calculate my self-employment tax burden?
- Remember your quarterly tax payments (if applicable)
- How can I reduce my self-employment tax burden?
- Why do I need a business bank account?
- Take control of self-employment taxes with a reliable banking partner
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Feel like taxes sting a bit more when you work for yourself? You’re not imagining things. Self-employment tax is the price of freedom in business—a tax burden that lands squarely on your shoulders. It’s not the same as income tax, so knowing how it works is central to keeping as much profit as you can for yourself.
The federal self-employment tax rate sits at 15.3% in 2024—and it applies to more of your earnings than you might expect. But play it smart this tax season, and you can reduce its impact while keeping your financial future secure. Here’s a breakdown of the numbers and the best ways to handle self-employment taxes in 2025.
How much is self-employment tax?
Self-employment tax covers contributions to Social Security and Medicare. In traditional jobs, these contributions usually split between employers and employees. When you’re self-employed, you’re your own boss—you pay both halves.
- 12.4% of the tax covers Social Security (applies to the first $176,100 of net earnings).
- 2.9% goes toward Medicare. This applies to all net earnings, no cap.
- If you earn more than $200,000 ($250,000 for joint filers), add an extra 0.9% Medicare tax.
Do I need to pay self-employment tax?
If you’re self-employed and earn more than $400 in net income during the year, the IRS expects you to pay taxes—regardless of whether you’re retired, already on Medicare, or working part-time. Self-employment tax applies to your earnings, so it’s essential to know where you stand.
You’ll need to pay self-employment tax if you’re:
- A freelancer, contractor, or gig worker.
- The owner of a sole proprietorship or single-member LLC.
- Running a side hustle that brings in more than $400 annually (yes, even small earnings count).
How can I calculate my self-employment tax burden?
Calculating your self-employment tax starts with determining your net earnings. Here’s a step-by-step guide to get it right:
- Start with your gross income from self-employment.
- Subtract eligible business expenses to determine your net earnings.
- Multiply your net earnings by 92.35%, which is the portion of your income subject to self-employment tax.
- Apply the self-employment tax rate of 15.3% (12.4% for Social Security and 2.9% for Medicare).
For example, if your net earnings are $50,000:
- Multiply $50,000 by 92.35%, which equals $46,175.
- Then multiply $46,175 by 15.3%, resulting in $7,062.
That’s your self-employment tax burden for the year. Keep in mind, this tax is separate from your income tax obligations.
Use the IRS Worksheet to Stay Accurate
To ensure precise calculations, use the Self-Employment Tax Worksheet in the IRS Form 1040-ES instructions. This worksheet walks you through each step of the process, helping you account for deductions like the employer-equivalent portion of self-employment tax, which can reduce your taxable income. By using the worksheet, you’ll avoid underpaying or overpaying and stay on track with your quarterly estimated payments.
Remember your quarterly tax payments (if applicable)
The IRS doesn’t wait until April to collect. If you expect to owe at least $1,000 in federal taxes for the year, you’re required to make quarterly estimated payments. These are due:
- April 15
- June 17
- September 16
- January 15 (of the following year)
Missing a payment can cost you. You don’t want to pay a penalty—it’s worth setting reminders if you need them. Calculate your quarterly payments with help from IRS Form 1040-ES to keep everything on track.
How can I reduce my self-employment tax burden?
Taxes are a fact of life, but paying more than you should be? That’s optional. There are plenty of solid strategies to reduce how much they take out of your hard-earned profits.
- Claim business expenses: Every business expense you can deduct trims your taxable income. Think beyond office supplies—expenses like software, professional development, business travel, and even part of your rent or mortgage (if you have a home office) are fair game. Documentat all of it. Keep receipts and track everything meticulously. Clean records are your safety net if the IRS ever needs to audit.
- Consider an S-Corp election: If your LLC is pulling in solid profits, switching to S-Corp status could mean major savings. You pay self-employment taxes only on your salary, not on your distributions. Those distributions are taxed at standard income rates, cutting your overall tax bill. Just know it’s not for everyone—managing payroll and setting a reasonable salary are part of the deal.
- Contribute to retirement accounts: Save for the future while lowering your tax bill today. Contributions to a Solo 401(k) or SEP IRA are tax-deductible. For 2025, a SEP IRA allows contributions up to 25% of your income or $66,000, whichever is less. A Solo 401(k) lets you contribute up to $22,500 (or $30,000 if you’re 50+), plus 25% of your net earnings. It’s a win-win—less tax now, more security later.
- Use the home office deduction: Run your business from home? If you use a dedicated space exclusively for work, you might qualify to deduct part of your rent, mortgage, utilities, or repairs. The IRS is clear—this space must be used regularly for business. So, your corner office in the living room? Perfectly fine. Your kitchen table? Not so much.
- Invest in professional help or tax software: Tax software made for self-employed individuals flags deductions you’d otherwise miss. Better yet, talk to a seasoned tax pro who knows the ins and outs of the tax code (recommended). They can help you save so much more than their fee costs.
Why do I need a business bank account?
Using your personal bank account for business might seem convenient. But it’s a fast track to mistakes and missed opportunities. A dedicated business bank account is an absolute must for self-employed people in any industry. It helps you:
- Keep your records clean: Mixing personal and business transactions is a recipe for confusion. With a separate account, every expense—whether it’s a client lunch or a software subscription—stays organized.
- Make tax prep painless: Digging through personal bank statements for business expenses is a nightmare. A business account keeps everything in one place, so you’re ready to file without the stress. Plus, clear separation helps you capitalize on valuable deductions.
- Boost your credibility: A business account shows your clients you’re serious. It builds trust. Whether you’re applying for a loan or negotiating with suppliers, a business account makes you look professional and reliable. It shows you’re in it for the long haul.
- Protect your legal standing: Run an LLC? You’re legally required to have a separate business banking account. Combining personal and business funds compromises your liability protection, putting your personal assets at risk.
Take control of self-employment taxes with a reliable banking partner
Self-employment tax may seem steep, but it’s the cost of running your own show—and the benefits of getting it right are well worth it. When you know the rules and stay organized, you can leverage smart deductions to reduce the burden and keep more of your hard-earned money working for you.
But all of that doesn’t mean much without the right financial setup—and North One has your back. With intuitive tools built for self-employed people, North One makes it easy to track expenses, plan for taxes, manage cash flow, and much more—all online. Whether it’s categorizing transactions or integrating with tax software, North One’s business bank account simplifies the trickiest parts of running your own business.
Never let tax season catch you off guard. Create your business bank account today and make managing your finances seamless and stress-free.
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1 Minimum $50 deposit required. See your Deposit Account Agreement for more details.
North One is a financial technology company, not a bank.
Banking services provided by The Bancorp Bank, N.A., Member FDIC.