You finally did it. You quit the 9-to-5, started landing your own clients, and that first big check cleared. It feels amazing until you realize the IRS is standing right behind you with two different collection buckets. Most people starting out assume they just pay a higher rate of income tax. They don't. The cold, hard reality is that is self employment tax in addition to income tax, and yes, you have to pay both.
It's a double whammy.
Think back to your old job. When you got your paycheck, you probably saw deductions for Social Security and Medicare. That was your half. Your boss paid the other half. Now that you’re the boss and the employee, you’re stuck with the whole bill. It’s basically the price of admission for being your own person, but it catches thousands of freelancers off guard every single April. Honestly, it’s the primary reason new businesses fail in their first two years—not because they didn't have customers, but because they didn't realize they were essentially being taxed twice on the same dollar.
The Brutal Math of the SE Tax
Let’s get into the weeds of how this actually works. When people ask if self employment tax is in addition to income tax, what they are really asking is: "Am I losing more than 30% of my money?" Usually, the answer is yes.
The self-employment tax rate is 15.3%. That is a fixed number. It consists of 12.4% for Social Security and 2.9% for Medicare. You pay this on your net earnings—which is basically your profit after you subtract your business expenses. But here is the kicker: you pay that 15.3% before you even start calculating your standard income tax. Your income tax is based on whatever tax bracket you fall into (10%, 12%, 22%, etc.), which is determined by your total taxable income.
So, if you make $60,000 in profit, you don't just pay income tax on $60,000. You pay about $9,000 right off the bat in self-employment tax, and then you also pay federal (and potentially state) income tax on the rest. It's heavy.
A Real-World Scenario
Let's look at Sarah. Sarah is a freelance graphic designer in Austin, Texas. Last year, she had a net profit of $80,000. Since she’s self-employed, she’s looking at roughly $11,300 in self-employment tax (calculated on 92.35% of her net earnings, because the IRS gives a small break there).
But she isn't done.
After that, she still owes federal income tax. Depending on her deductions and filing status, she might owe another $8,000 to $10,000 in regular income tax. By the time the dust settles, nearly $20,000 of her $80,000 is gone. If she hadn't been setting money aside in a high-yield savings account every month, she’d be in a massive hole. Most people don't realize that the "employer" portion of the tax—the part your old company used to hide from you—is now your responsibility. It feels unfair. It feels like a penalty for being an entrepreneur. But it’s just how the Social Security system stays funded.
Why the IRS Sees You as Two People
The reason is self employment tax in addition to income tax comes down to how the government defines "employment." When you work for a company, the law requires the employer to pay half of the FICA (Federal Insurance Contributions Act) taxes.
When you go solo, the IRS views you as two distinct entities:
- The Employer: The business owner who provides the job.
- The Employee: The person doing the work.
Because you are both, you pay both shares. It’s a bit of a bureaucratic nightmare, but there is one tiny silver lining. You can actually deduct the "employer" half of your self-employment tax (7.65%) from your gross income when calculating your income tax. It’s an "above-the-line" deduction. It doesn't mean you don't pay the tax, but it does mean you aren't paying income tax on the money you spent paying your self-employment tax. Small victories, right?
The Quarterly Trap
If you’re used to a W-2 job, you never really thought about taxes except in April. You’d get a refund or pay a few hundred bucks. Self-employment flips that on its head. Because there is no boss to withhold your taxes, the IRS expects you to pay as you go.
These are called Estimated Quarterly Tax Payments.
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If you wait until April 15th to pay both your self-employment tax and your income tax for the entire previous year, you’re going to get hit with underpayment penalties. The IRS wants their cut four times a year: April, June, September, and January. Missing these deadlines is a slippery slope. I've seen freelancers ignore the first two quarters because they needed the cash for equipment or rent, only to realize by September that they owe $15,000 with no way to pay it.
Honestly, it’s stressful. You have to become your own accountant or hire one. If you're doing more than $50,000 a year in profit, you should probably be looking at an S-Corp election, which can sometimes help reduce the self-employment tax burden by allowing you to pay yourself a "reasonable salary" and take the rest as a distribution. But that's a whole other level of paperwork.
Nuances Most People Miss
It isn't just a flat tax across the board. There are caps.
For 2024, only the first $168,600 of your earnings is subject to the Social Security portion (the 12.4%). Anything you make above that is only hit with the 2.9% Medicare tax. So, if you're a high-earning consultant making $250,000, your effective self-employment tax rate actually starts to drop as you earn more.
Also, don't forget the Additional Medicare Tax. If you’re a single filer and your total income hits $200,000 ($250,000 for married couples), there is an extra 0.9% tax on top of everything else. The government has a way of finding more buckets to fill.
Is there any way out?
Not really, but you can be smarter about it. Every single business expense—that laptop, the portion of your internet bill, the software subscriptions, the travel to a conference—reduces your net profit. And since your self-employment tax is based on net profit, every dollar you legally deduct saves you about 15.3 cents in SE tax plus whatever your income tax rate is.
If you're in the 22% bracket, a $1,000 deduction actually saves you about $370 in total taxes. That’s why keeping receipts is so vital. It’s not just about organization; it’s about survival.
Common Misconceptions to Avoid
- "I didn't make enough to owe taxes." If your net earnings were $400 or more, you have to file a return and pay self-employment tax. Even if you don't owe any income tax because of the standard deduction, you still owe that 15.3% SE tax.
- "I'm just a side hustler, it doesn't apply." It does. Whether it's Uber, Etsy, or consulting, if it's 1099 income, the IRS wants their SE tax.
- "I can just pay at the end of the year." You can, but you'll pay a penalty. The IRS hates being an interest-free lender.
What You Should Do Right Now
The transition from employee to business owner is a mental shift as much as a financial one. You have to stop looking at your bank balance as "your money." A big chunk of it—roughly 25% to 35%—belongs to the government.
Step 1: Open a Separate Tax Savings Account
Do not keep your tax money in your checking account. You will spend it. Every time a client pays you, immediately move 30% of that check into a separate account. If you end up owing less, you've just given yourself a bonus.
Step 2: Track Every Single Expense
Use apps like Quickbooks, FreshBooks, or even a simple spreadsheet. If you don't track it, you can't deduct it. If you can't deduct it, you’re paying 15.3% tax on money you already spent.
Step 3: Calculate Your Estimated Payments
Use Form 1040-ES. It’s boring and the math is annoying, but it prevents the April panic. If your business is growing fast, talk to a CPA. A good accountant will cost you $500 to $1,000, but they will likely save you triple that in tax strategies you didn't know existed.
Step 4: Look into an S-Corp
If your net profit is consistently over $60,000 or $70,000, ask a pro if an S-Corp election makes sense. It allows you to split your income between a "salary" (which gets the 15.3% tax) and "distributions" (which do not). This is one of the few legal ways to actually lower that self-employment tax burden.
Being self-employed is rewarding, but the tax structure is designed for a world where everyone has a traditional boss. Since you've broken out of that mold, you have to play by a different, more expensive set of rules. Understanding that is self employment tax in addition to income tax is the first step toward actually keeping the money you work so hard to earn. Don't let the IRS catch you off guard; start planning your quarterly strategy today to avoid penalties and keep your business's cash flow healthy.