What is US Self-Employment Tax: The Ultimate Guide

If you’re self-employed, you already know that you generally enjoy greater flexibility and autonomy when it comes to your chosen trade or business. 

However, this also means you are responsible for filing your own taxes and can’t rely on an employer to do it for you.

When it comes to dealing with the US tax authorities, there are numerous figures to gather and an array of forms to be completed. And, if you miss your filing deadline, you can expect penalties. 

Here, we help you navigate the common challenges of US self-employed tax.

What is the US Self-Employment Tax?

In 1935, the Federal Insurance Contribution Act (FICA) established certain taxes to fund Social Security and Medicare through salary deductions.  

The FICA tax of 15.3% is split between the employee and their employer, who each pay 7.65%.

However, the original FICA tax code did not specify the tax obligation of self-employed individuals. So, in 1954, the US government passed the Self-Employed Contributions Act (SECA).

SECA required self-employed individuals to pay the 15.3% in full, as opposed to 7.65% for regular employees.

The self-employment tax rate is, therefore, the sum of the Social Security Tax (12.4%) and Medicare Tax (2.9%) and applies to the net earnings of self-employed individuals. 

Who is a Self-Employed Person?

For tax purposes, the Internal Revenue Service (IRS) considers you self-employed if:

• You work as a sole proprietor or an independent contractor
• You’re a member of a partnership
• You do contractual or part-time work.

US Self-Employment Tax Rates for 2025

The self-employment tax rate for 2025 is 15.3%. However, net earnings over a certain threshold are not subject to the Social Security tax, whereas Medicare taxes apply to all your net earnings regardless of how much you earn. 

Regarding tax rates, it’s important to keep the following in mind:

• For 2025, the first US$168,600 of earnings is subject to the Social Security portion
• An additional 0.9% Medicare tax may apply if net earnings exceed US$200,000 (for a single filer) and US$250,000 (for joint filers).

Self-Employment Tax Deductions

In terms of deductions for self-employment tax, you have a few options. 

According to the IRS, when calculating your adjusted gross income, you can deduct the employer’s half (7.65%) of your self-employment tax, so you can cut what you pay in half.

Self-employed individuals can also qualify for an income tax deduction based on the cost of health insurance.

You may also qualify for a business income deduction, allowing you to take an income tax deduction for up to 20% of your self-employment income. 

Lastly, it’s also possible to deduct half of your self-employment tax from your adjusted gross income and decrease the total amount of payable taxes.

How To Calculate Your Self-Employment Tax

To calculate your self-employment tax, you must first calculate your net earnings by subtracting any deductions, like business expenses, from your gross income.

• 7.65% of your self-employment tax is generally considered a deductible expense, subjecting only 92.35% of your net earnings to self-employment tax.
• Once you’ve determined your taxable net earnings, you apply the 15.3% – 7.65% = 7.65% tax rate.
• For 2024, the first US$168,600 of earnings is subject to the Social Security portion. The figure will rise to US$176,100 in 2025.

Who Pays US Self-Employment Tax?

You must pay self-employment tax if you meet any of the following conditions:

• Your net earnings from self-employment (not including church employee income) were US$400 or more
• You earned US$108.28 or more from church employment.

The self-employment tax rules apply no matter how old you are and even if you’re receiving Social Security or Medicare.

You may be considered self-employed for IRS tax purposes if you received a 1099 form from an entity you worked for.

How To Pay Self-Employment Taxes in the US

Typically, you use Form 1040 Schedule C to calculate your net earnings from self-employment and Schedule SE to calculate your taxable amount. 

You must provide your Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN).

If you’re self-employed, you may need to make quarterly estimated tax payments if you expect:

• You’ll owe at least US$1,000 in federal income taxes this year, even after accounting for your refundable and withholding tax credits 
• Your withholding and refundable credits will cover less than 90% of your tax liability for this year or 100% last year – whichever is smaller.

Estimated taxes are used for the self-employed since they don’t have an employer to withhold their taxes. You must use Form 1040-ES (Estimated Tax for Individuals) to file these quarterly payments.

Typically, estimated taxes must be paid by the 15th of April, June, September and January. These dates shift to the next business day if the 15th falls on a weekend or a holiday.

US Self-Employment: Pros and Cons

Self-employment in the US is an enticing prospect for many. However, it comes with its own set of advantages and challenges. Here’s a look at the pros and cons of being self-employed in the US.

Pros of being Self-Employed 

Income Potential: Home to the highest number of millionaires in the world and the largest economy, the US offers unlimited income potential for many. 

Networking Potential: The US market, in particular locations such as Silicon Valley and New York, gives self-employed individuals and those building a business from the ground up a wide network of professionals and valuable partnerships.

Investment Opportunities: Home to more Fortune 500 companies than any other country in the world, including most of the world’s tech giants, the US offers an abundance of investment opportunities. The US stock market and real estate market are deemed to offer some of the most profitable and safe investments available.

Cons of Being Self-Employed

Legal and compliance issues: Maintaining compliance with legal and tax obligations in the US has become a massive burden for many.

Tax obligations: One of the predominant disadvantages of US citizenship is the country’s tax obligations that require citizens to pay taxes on their income, regardless of where it is earned in the world. 

Lack of freedom and privacy: We believe you’re entitled to both personal and professional freedom. Many self-employed entrepreneurs understandably prefer to set up a foreign corporation to add a layer of privacy and security to their operations. 

Endless paperwork: US-based, self-employed individuals have to contend with extensive paperwork and filing requirements each year. This involves precious time and expense that could be devoted to business endeavours.

How to Lower Your US Taxes

There are, thankfully, options to lower your tax burden as a US citizen.

Living offshore 

To lower your taxes as a US person, you can choose to live offshore while retaining your citizenship. Living offshore offers tax benefits, though it doesn’t eliminate capital gains tax. 

The Foreign Earned Income Exclusion (FEIE) allows a tax-free salary of up to US$126,500 (adjusted annually) per spouse, with anything beyond that taxed at standard rates. An efficiently structured corporate entity may also benefit from a lower tax rate.

However, if US persons own at least half of a foreign corporation, it is subject to tax and requires you to continue filing US tax returns and report a foreign corporation.

Moving to Puerto Rico 

Moving to Puerto Rico can also help a US self-employed citizen reduce their tax burden while keeping their citizenship.

As a US territory, it requires no residence permits, allowing easy travel to the US mainland. Under Act 60, individuals benefit from a 4% corporate tax rate and no taxes on dividends, along with the potential for zero capital gains tax after relocation.

To qualify, you must live in Puerto Rico full-time for at least 549 days over three years, spending no more than 90 days in the US each year.

Puerto Rico must also be your tax home, and you need to show a closer connection to the island than the mainland. This opportunity is particularly advantageous for location-independent workers and crypto investors.

Renouncing US Citizenship

Renouncing US citizenship is a definitive way to eliminate US taxes. Many choose to give up their passports primarily for tax benefits, as renunciation eliminates the need to file US tax returns or report foreign income unless it is US-sourced.

This decisive step removes the burden of dealing with dual taxation and can optimise estate tax planning and the opportunity to choose a citizenship where taxes aren’t a burden. 

However, renouncing US citizenship is a significant decision with far-reaching implications. It may not be suitable for everyone, especially those with substantial US-sourced income or ongoing connections through business operations in the US.

The initial step is obtaining citizenship in another country, often achieved through citizenship by investment or citizenship by descent. 

What is US Self-Employment Tax: FAQs

Is the US the Best Jurisdiction for the Self-Employed?

At 15.3%, the self-employment tax rate in the US does not compare favourably with that of many low-tax jurisdictions.

In fact, it is high compared to the 1-3% rate available in Georgia (the country, not the US state) for individual entrepreneurs or the 0% tax rate in the Cayman Islands, for example. 

Entrepreneurs there don’t need to worry about filing tax forms and losing a hefty chunk of their income to taxes. Instead, they can focus on growing their business by reinvesting their profits.

There is also an ever-increasing pool of digital nomad visa countries that offer tax-free lifestyles, growth opportunities and the conditions you want as a self-employed individual.

The US has much to offer, but that doesn’t mean you should close yourself off to the opportunities elsewhere. At Nomad Capitalist, we’ve helped people like you move their families and businesses to over 30 tax-friendly jurisdictions. 

Our experts are available to help you identify the best country to meet your unique goals and complete the immigration process smoothly. 

If you want to achieve financial and personal freedom, set up a call today to learn how we can help you.