Estimated Quarterly Taxes: Who Pays and How It Works
From Tax Guide.
Tax Guide · Arab, Alabama
Self-Employment Tax Explained: What You Owe and Why
Self-employment tax is Social Security plus Medicare for people who work for themselves. Learn who pays it, how Schedule SE works and how to plan.
The short answer
What is self-employment tax?
Self-employment tax is the Social Security and Medicare tax paid by people who work for themselves, and it is separate from regular income tax.
When you work for an employer, the employer withholds Social Security and Medicare tax from your paycheck and pays a matching share. When you are your own boss, nobody splits that bill with you. You pay both halves yourself, which is why the self-employment tax can feel like a surprise at filing time.
The tax pays into the same Social Security and Medicare programs as everyone else's payroll taxes. Your earnings from self-employment count toward your future benefits, so it is not money that simply disappears.
Who pays it
Who has to pay self-employment tax?
Generally, you owe self-employment tax if you have net earnings from your own business above a small yearly threshold set by the IRS.
The tax applies to income you earn outside of a paycheck. It does not matter whether the work is full time or a side job, and it does not matter whether you are over 65 or already drawing Social Security. If the profit is above the IRS threshold, the tax usually applies.
You may be self-employed for tax purposes in more ways than you would guess:
- Sole proprietors, including freelancers, consultants, hairstylists, tradespeople and small farmers
- Independent contractors who receive a Form 1099-NEC instead of a W-2 (see our guide on independent contractor taxes and 1099-NEC)
- Partners in a partnership, generally on their share of the business profit
- Gig and side-hustle workers, which we cover in gig work and side hustle taxes
How it works
How is self-employment tax figured on Schedule SE?
You figure the tax on Schedule SE, which starts with your net profit from Schedule C, and the result carries over to your Form 1040.
Net profit is your business income minus your allowable business expenses. That means every legitimate expense you track lowers the profit that the tax is figured on, which is one reason good records matter. Our guide to business expense deductions explains which costs usually count.
The IRS applies its self-employment tax rate to a portion of your net profit, and Social Security tax stops applying once earnings pass an annual wage base that the IRS updates every year. Medicare tax has no such cap, and higher earners may owe an additional Medicare tax. We do not quote the rates here because they can change, and we confirm the current ones when we prepare your return.
One helpful feature: you may generally deduct part of your self-employment tax when you figure your income tax. That deduction lowers your income tax, though not the self-employment tax itself.
Comparison
Employee vs self-employed: who pays what?
The tax itself is the same kind of tax for both, but an employee shares it with an employer and a self-employed person carries all of it.
The table below shows the practical differences.
| Item | Employee | Self-employed |
|---|---|---|
| Social Security and Medicare | Split with the employer | You pay both halves |
| How it is paid | Withheld from each paycheck | Usually paid through estimated payments and at filing |
| Form showing income | W-2 | Often 1099-NEC or 1099-K, or none at all |
| Where it is figured | Payroll withholding | Schedule SE with your Form 1040 |
Income counts whether or not you receive a form. Cash and payments without a 1099 are still reportable.
Paying it
How do I pay self-employment tax during the year?
Most self-employed people pay it in installments through the year, called estimated taxes, instead of one large bill in the spring.
Because no employer is withholding, the IRS expects you to send payments as you earn, using Form 1040-ES. These payments cover both your income tax and your self-employment tax. Missing them can lead to an underpayment penalty, even if you pay everything you owe when you file.
Our guide on estimated quarterly taxes walks through who has to pay and how the installments work. If you also have a job with withholding, changing your W-4 can sometimes cover part of the tax on the side income instead.
Alabama has its own income tax rules for the profit from your business, so your Alabama return is a separate step. Self-employment tax itself is a federal tax, and we check how the Alabama side applies to you.
Common questions
Ways to keep self-employment tax manageable
You cannot avoid the tax on real profit, but good habits keep it accurate and prevent unpleasant surprises.
Nothing here is a shortcut, and no tactic replaces the need to report all of your income. These habits simply help you pay the correct amount and no more:
- Keep business and personal money in separate accounts
- Record income and expenses as they happen, not at year end
- Set aside a portion of each payment you receive for taxes
- Keep receipts and mileage logs for the time the IRS may review your return
- Review your numbers partway through the year with someone who knows your situation
How we can help
Help with self-employment taxes in Arab, Alabama
Melton Tax Services prepares income tax returns for the self-employed, including Schedule C and Schedule SE.
We go through your income and expenses, prepare your federal and Alabama returns and explain what you owe and why. To see how it works, visit our income tax preparation page, or use our contact page. You can also call the office at 256-586-4635.
We serve Arab and the surrounding area. Please do not send Social Security numbers or tax documents through the website. Bring them to the office or call us first.
Answers
Questions about self-employment tax
Do I pay self-employment tax if I also have a regular job?
Usually yes, on the profit from your side business. Your job's Social Security and Medicare tax is handled through payroll, but the self-employment income is figured separately on Schedule SE. The rules can be more involved once combined earnings are high, so we look at both.
Is self-employment tax the same as income tax?
No. Income tax and self-employment tax are two different taxes figured on different parts of the return. You can owe one, the other or both, depending on your profit and your deductions.
Do I owe self-employment tax if I have a loss?
Generally, self-employment tax is figured on net profit, so a business with no net profit usually has none. A loss may affect the rest of your return in other ways, and some limits can apply, so it helps to review it.
Does self-employment tax apply if I receive no 1099?
Yes, it can. Income is reportable whether or not a customer sends you a form. A missing 1099 does not make the earnings tax free.
Can I deduct anything to lower self-employment tax?
Business expenses lower your net profit, and that lowers the earnings the tax is figured on. Only ordinary and necessary business costs count, and personal expenses do not. See our guide on business expense deductions for examples.
Do retirees owe self-employment tax?
They can. Working for yourself after you start collecting Social Security still produces self-employment income, and the tax generally still applies. Alabama does not tax Social Security benefits, but that has no effect on this federal tax.
Read next
Related reading
Business Expense Deductions: What Can I Write Off?
From Tax Guide.
Gig Work and Side Hustle Taxes: Uber, DoorDash and More
From Tax Guide.
Income Tax Services
A service Melton Tax Services provides.
Melton Tax Services
Questions about your taxes or your business?
Our team in Arab is just a phone call away, and we are glad to talk it through with you.