Self-employment income is taxed differently—and usually more heavily—than wages. Understanding this prevents nasty surprises.
The Self-Employment Tax
When you're employed, you pay 7.65% for Social Security and Medicare. Your employer pays another 7.65%.
When you're self-employed, you pay BOTH halves: 15.3%
| Tax | Rate | Max Income |
|---|---|---|
| Social Security | 12.4% | $168,600 (2024) |
| Medicare | 2.9% | No limit |
| Additional Medicare | 0.9% | Over $200k single |
This is ON TOP of income tax.
Watch Out
$10,000 in side hustle income isn't $10,000 profit. After 15.3% SE tax + income tax, you might keep only $6,000-7,000.
The Math
$50,000 self-employment income:
| Tax | Calculation | Amount |
|---|---|---|
| Self-employment tax | $50,000 × 15.3% | $7,650 |
| Income tax (22% bracket) | ~$44,175 × 22% | $9,719 |
| Total federal tax | $17,369 |
That's a 35% effective rate—before state taxes!
Reducing Self-Employment Tax
Deduct Business Expenses
Every legitimate expense reduces taxable income AND SE tax.
Common deductions:
- Home office (dedicated space)
- Equipment and supplies
- Software and subscriptions
- Mileage (67¢/mile in 2024)
- Professional development
- premiums
- Business meals (50%)
Do This
Track EVERY business expense. Use a separate business bank account and credit card. Apps like Keeper or Hurdlr automate this.
The S-Corp Strategy
If you earn $50k+ in self-employment income, consider electing S-Corp status.
How it works:
- Form an LLC and elect S-Corp taxation
- Pay yourself a "reasonable salary"
- Take remaining profit as distributions
Example:
- Self-employment income: $100,000
- Pay yourself salary: $60,000 (SE tax applies)
- Distribution: $40,000 (NO SE tax)
- SE tax savings: ~$6,120
Watch Out
S-Corp has compliance costs (payroll, tax filings). Usually only makes sense above $50-75k net profit.
Retirement Accounts for the Self-Employed
These reduce income tax AND help you save:
| Account | Max Contribution | Notes |
|---|---|---|
| Solo 401(k) | $69,000 (2024) | Best for high earners |
| SEP-IRA | 25% of net SE income | Simpler, high limits |
| SIMPLE IRA | $16,000 | For S-Corps with employees |
| $7,000 | Limited if you have 401k |
Pro Tip
A Solo 401(k) lets you contribute as both employer AND employee—huge tax savings potential.
Quarterly Estimated Taxes
No employer withholds your taxes. You must pay quarterly:
- April 15
- June 15
- September 15
- January 15
Penalty if you don't: Interest on underpayment
Do This
Safe harbor rules: Pay either:
- 100% of last year's tax (110% if income over $150k)
- 90% of this year's tax
Either option avoids penalties.
Record Keeping
Keep for at least 3 years (7 is safer):
- All income records
- All expense receipts
- Mileage logs
- Home office measurements
- Bank and credit card statements
- Contracts and invoices
When to Get Help
| Situation | Action |
|---|---|
| Side hustle under $5k | Probably DIY |
| $5k-50k net profit | Tax software or CPA review |
| Over $50k net profit | CPA strongly recommended |
| Considering S-Corp | CPA required |
Quick Win
If you have self-employment income, open a separate savings account and automatically transfer 30% of every payment for taxes. Never touch it until tax time.