When you transition from W-2 employment to freelancing, one of the biggest tax shocks is self-employment tax. Here is exactly what it is, why you pay both halves, and how to minimize it legally.
The 15.3% breakdown
Self-employment tax consists of two distinct components mandated by the Federal Insurance Contributions Act (FICA):
- Social Security (12.4%): Applies to your net earnings up to the annual wage base limit ($168,600 in 2024; $176,100 in 2025). Any income above this cap is exempt from the 12.4% portion.
- Medicare (2.9%): Applies to 100% of your net self-employment earnings with no income cap. An Additional Medicare Tax of 0.9% applies to single filers earning over $200,000 ($250,000 for married filing jointly).
The 92.35% calculation rule
The IRS does not apply 15.3% to your entire net profit. Instead, you multiply your net Schedule C profit by 92.35% (0.9235) before computing the tax. This effectively simulates the employer-side deduction.
The above-the-line deduction
When you file Form 1040, you are allowed to deduct exactly half (50%) of your total self-employment tax as an above-the-line adjustment to income on Schedule 1. This reduces your Adjusted Gross Income (AGI) before calculating federal income tax.