By Christian BrinkleyLicensed NC Insurance Agent, NPN 22217190, NC Life & Health · Updated October 14, 2026 · 4 min read
If you have only ever been an employee, your first year of freelance or side gig income comes with a nasty surprise. You do the work, you get paid, you set aside money for income tax, and then you find out about a second tax you never paid before. That is the self-employment tax. Here is what it is. When you work a regular job, you and your employer split the cost of Social Security and Medicare taxes. You see your half come out of every paycheck. Your employer quietly pays the other half. You never think about it.
When you work for yourself, there is no employer
So you pay both halves. That combined bill is the self-employment tax. It is Social Security tax plus Medicare tax, both the employee half and the employer half, on your net earnings from self-employment.
Notice the key word: net. You do not pay it on every dollar that comes in. You pay it on your profit, meaning your business income minus your business expenses. If you earned some amount freelancing and spent some amount on business costs, the tax applies to what is left. This is why tracking expenses matters so much for self-employed people. Every legitimate business expense shrinks both your income tax and your self-employment tax.
How is it different from income tax?
They are two separate taxes that happen to be calculated on the same return. Income tax is based on your total income from all sources, with brackets, deductions, the whole system. Self-employment tax is a flat-ish rate applied to your self-employment profit, and it funds Social Security and Medicare specifically. You can think of income tax as paying for the government in general, and self-employment tax as paying into your own future Social Security and Medicare.
The rates are set by law and apply in two pieces. Social Security tax applies up to an annual wage cap, and earnings above the cap are not subject to it. Medicare tax has no cap, and there is an additional Medicare tax on earnings above a higher threshold. I am not giving you the exact rates and caps here because they change. Check irs.gov for the current year's numbers.
The other surprise for new freelancers is how it gets paid
Employees have tax withheld every paycheck. Nobody withholds anything from your freelance checks. So you generally pay self-employment tax through quarterly estimated tax payments, four times a year. Miss those and you can owe an underpayment penalty on top of the tax itself. If this is your first self-employed year, put the quarterly dates on your calendar now.
A question that comes up a lot: does forming an LLC change this? By itself, no. A single-member LLC is ignored for federal tax purposes by default, which means the IRS treats you exactly like a sole proprietor. You still owe self-employment tax on the profit. An LLC helps with legal liability, not with this tax. There are elections, like S corporation status, that can change the picture, but that is a bigger decision with its own tradeoffs, and it is worth a conversation with a tax professional before you do it.
The practical playbook for someone starting out is simple
Open a separate bank account for the business, even if it is just a second checking account. Track every business expense from day one, because each one reduces this tax. Set aside a percentage of every payment you receive for taxes, in a separate savings account you do not touch. And make those quarterly payments.
Self-employment tax is not a punishment for working for yourself. It is the same Social Security and Medicare funding every worker pays. It just feels bigger because you see the whole bill instead of half of it. Knowing it is coming is most of the battle.
This is general information, not tax advice. Rates, caps, and thresholds change yearly, so check irs.gov for current figures, and talk to a tax professional about your situation.
Questions people ask me about this
How is it different from income tax?
They are two separate taxes that happen to be calculated on the same return. Income tax is based on your total income from all sources, with brackets, deductions, the whole system. Self-employment tax is a flat-ish rate applied to your self-employment profit, and it funds Social Security and Medicare specifically.
When is you work for yourself, there no employer?
So you pay both halves. That combined bill is the self-employment tax. It is Social Security tax plus Medicare tax, both the employee half and the employer half, on your net earnings from self-employment. Notice the key word: net. You do not pay it on every dollar that comes in.
What should I know about the other surprise for new freelancers?
Employees have tax withheld every paycheck. Nobody withholds anything from your freelance checks. So you generally pay self-employment tax through quarterly estimated tax payments, four times a year. Miss those and you can owe an underpayment penalty on top of the tax itself.
Get the next guide by email
New guides go out when they are published. No spam, no selling your address, unsubscribe any time.