In more detail
An employee and employer each pay 7.65% of wages for Social Security and Medicare; a self-employed person pays both halves, 15.3%. It is made of 12.4% for Social Security, which applies only up to a yearly earnings cap, and 2.9% for Medicare, which has no cap (an extra 0.9% Medicare tax applies above certain income thresholds). The rate is applied to 92.35% of net profit, which mirrors the employer half not being part of an employee's taxable wage. It is owed when net self-employment earnings are $400 or more, on top of income tax, and half of it is deductible when working out income tax.
Why it matters
People new to freelancing often set money aside for income tax only and are surprised by a second, large bill. Because nothing is withheld, self-employed people usually pay estimated tax quarterly to avoid penalties.
Example
On $50,000 of net profit:
- Taxable base:
50,000 × 0.9235= $46,175.00 - Social Security (12.4%): $5,725.70
- Medicare (2.9%): $1,339.08
- Self-employment tax: $7,064.78, about $7,065
- Deductible half: $3,532.39