Self-employment tax is the contribution that people who work for themselves pay to fund social insurance programmes such as pensions and health cover. Because a sole trader or freelancer has no employer to split the cost, they generally shoulder both the employee and employer share.
In the United States the term has a precise meaning: a 15.3% charge covering Social Security (12.4% up to an annual wage cap) and Medicare (2.9%, with no cap). It is calculated on net business profit and sits on top of ordinary income tax. Other countries reach the same goal differently. In the United Kingdom the self-employed pay Class 2 and Class 4 National Insurance. Italian freelancers contribute to INPS or a professional fund, French independents pay into URSSAF, and German freelancers may join the statutory or private system depending on their profession.
Imagine a US freelancer with 60,000 of net profit. Roughly 92.35% of that, about 55,410, is subject to the 15.3% rate, giving a self-employment tax near 8,478, half of which is deductible against income tax.
- It funds retirement and health benefits, not general spending.
- It is separate from income tax and often forgotten at filing time.
These payments overlap with broader social security contributions. Set money aside early with the tax set-aside calculator.