Self-employment comes with an unlimited list of benefits. If you’ve recently taken the leap to become a Business-of-One, you have newfound control over your schedule that most full-time workers can only dream of.
But when you work for yourself, you also have to pay additional taxes to make up for the portion of taxes employers cover when you get a W-2. Here’s a quick dive into what you need to know about taxes when you’re self-employed.
How taxes work when you’re self-employed
When you’re self-employed, your taxes can work a few different ways. By default, or if you register your business as an LLC, you’ll have to pay self-employment tax on all of the income you earn from your company. That is on top of the regular income taxes you pay regardless of your employment.
“Self-employment tax” is a term commonly used to refer to the Social Security and Medicare taxes you pay when self-employed. When you have a full-time job with a W-2, your employer covers half of your Social Security and Medicare taxes. When you’re self-employed or work as a contractor, you pay the employer’s portion as well.
The current self-employment tax rate is 15.3% and the bulk of that, 12.4%, goes toward Social Security. The remaining 2.9% goes to Medicare. These taxes apply to income up to $176,100 in 2025 (up from $168,600 in 2024). If you earn more than $200,000 as a single filer or $250,000 as a joint filer, you could also pay an additional Medicare tax of 0.9%.
If you live to a ripe old age, you should get a good portion of this back from your Social Security and Medicare benefits. However, minimizing your self-employment tax works out in your favor when you’re able.
Self-employment taxes vs. income taxes
Even if you don’t own a business, you still have to pay taxes. It’s important to distinguish between income tax and self-employment tax, as they work differently and require different tax rates.
Income tax is a tax paid by all U.S. residents and is used to pay for a big chunk of the federal government’s annual budget. This is a graduated tax, which means you pay a higher rate on incremental dollars as you earn more. For example, if you’re a single filer earning $40,000, you’ll pay 10% on the first $11,925 that you earn and 12% on the remaining $28,075.
For federal income taxes, it doesn’t matter if you earn income from an employer or self-employment. Your tax rates here are going to be the same regardless.
2025 Marginal Tax Rates
| Marginal Tax Rate | Single Taxpayers | Married Filing Jointly |
|---|---|---|
| 10% | $0 to $11,925 | $0 to $23,850 |
| 12% | $11,926 to $48,475 | $23,851 to $96,950 |
| 22% | $48,476 to $103,350 | $96,951 to $206,70 |
| 24% | $103,351 to $197,300 | $206,701 to $394,600 |
| 32% | $197,301 to $250,525 | $394,601 to $501,050 |
| 35% | $250,526 to $626,350 | $501,051 to $751,600 |
| 37% | $626,351 or more | $751,601 or more |
Source: IRS
Self-employment taxes are specific taxes for Social Security and Medicare. When you work for someone else, the total taxes you pay are lower than when you’re self-employed. But as your own boss who decides your paychecks, you could have opportunities to save on self-employment tax.
How S Corps help you save on self-employment tax
Part-time side hustlers and newly self-employed business owners should plan on paying self-employment tax on the income they earn from their business. As your business grows, the numbers could work out in your favor to save money with S Corp taxation.
When you operate as an LLC taxed as an S Corp or register directly as an S Corp with your state, your income is divided between employee paychecks and business profits. You have to pay income taxes on everything you earn, but you only have to pay self-employment tax on your wages. Depending on your paychecks and total income, that could easily add up to thousands of dollars in annual savings.
The accounting wizards at Collective did the math and found that most business owners start to benefit from an S Corp when bringing in $80,000 or more in net profit per year. If you are making less, keep hustling, and you could find S Corp savings in your future. If you’re already there, consider reaching out to Collective to learn more about how we can help you save thousands of dollars with an S Corp of your very own.
Structure your business with taxes in mind
Just think about what you could do with an extra couple of thousand dollars per year. You could roll it back into your business to buy a fancy new laptop or supplies. Or maybe you would rather use the savings to treat yourself to a vacation. How you use your money is up to you.
But if you just follow the default, you could wind up paying a lot more in taxes than you need to. When you structure your business with taxes in mind, your biggest problem will be what to do with all of that extra money.
