Understanding Self-Employment Tax vs Income Tax

One of the most confusing aspects of freelance taxation is understanding the difference between self-employment tax and income tax. While both are taxes you pay, they serve different purposes and are calculated differently.

What is Income Tax?

Income tax is a tax on your earnings (profit) from your business. It's calculated based on your taxable income after deductions and follows a progressive tax bracket system:

2025 U.S. Income Tax Brackets (Single Filers)

10% on income up to $11,600
12% on income $11,601 - $47,150
22% on income $47,151 - $100,525
24% on income $100,526 - $191,950
32% on income $191,951 - $243,725
35% on income $243,726 - $609,350
37% on income over $609,350

Income tax applies to your net profit (total income minus business deductions), and you pay this tax whether you're an employee or self-employed.

What is Self-Employment Tax?

Self-employment tax is specifically for Social Security and Medicare contributions. When you're an employee, your employer pays half of these taxes (7.65%) and you pay the other half (7.65%) through payroll deductions. As a freelancer, you're responsible for paying the entire 15.3% yourself.

Self-Employment Tax Breakdown (2025)

Social Security: 12.4% on the first $160,200 of net earnings
Medicare: 2.9% on all net earnings
Additional Medicare: 0.9% on earnings over $200,000 (single) or $250,000 (married)

This tax is calculated on your net earnings (profit) from self-employment, not your gross income.

Key Differences

Aspect	Income Tax	Self-Employment Tax
Purpose	General government revenue	Social Security & Medicare
Rate	Progressive (10% - 37%)	Flat 15.3% (up to cap)
Calculation Base	Taxable income	Net earnings (92.35% of net profit)
Deductions	Many deductions available	Limited deductions
Applies To	Everyone	Self-employed only

How They Work Together

As a freelancer, you pay both taxes:

Calculate your net profit: Total income minus business expenses
Calculate self-employment tax: 15.3% of 92.35% of your net profit (up to the Social Security cap)
Calculate income tax: Based on your taxable income (which includes your net profit)
Important: You can deduct half of your self-employment tax when calculating income tax

Tax Benefit: Half of your self-employment tax (the employer portion) is deductible as a business expense, reducing your income tax burden.

Example Calculation

Let's say you earned $100,000 in freelance income with $20,000 in deductible expenses:

Gross Income: $100,000

Business Expenses: -$20,000

Net Profit: $80,000

Self-Employment Tax:

$80,000 × 92.35% = $73,880

$73,880 × 15.3% = $11,304

Income Tax (simplified):

Taxable income: $80,000

Self-employment tax deduction: -$5,652

Adjusted taxable income: ~$74,348

Estimated income tax: ~$11,500

Total Taxes: ~$22,804

Strategies to Minimize Both Taxes

Maximize Deductions: Track all business expenses to reduce both income tax and self-employment tax bases
Contribute to Retirement: SEP-IRA or Solo 401(k) contributions reduce taxable income
Health Savings Account: HSA contributions are tax-deductible
Consider Business Structure: S-Corporation may help reduce self-employment taxes
Time Expenses: Make large purchases before year-end to maximize deductions

Quarterly Payments

Both income tax and self-employment tax must be paid quarterly if you expect to owe $1,000 or more for the year. Your quarterly payments should cover:

Estimated income tax
Estimated self-employment tax

It's common to set aside 25-30% of each payment for taxes to cover both types.

Common Misconceptions

"Self-employment tax is optional" - No, it's mandatory if you earn $400 or more from self-employment
"I only pay one or the other" - You pay both, but they're calculated differently
"Employees don't pay these taxes" - They do, but it's split between employer and employee
"I can avoid self-employment tax" - You can minimize it but not eliminate it legally

Conclusion

Understanding the difference between income tax and self-employment tax is crucial for freelancers. While both reduce your take-home pay, they serve different purposes and are calculated separately. By maximizing deductions and using tax-advantaged strategies, you can minimize both types of taxes and keep more of your hard-earned money.