Self-employed tax survival: Explaining the basics of filing SE taxes

Self-employment offers flexibility and freedom that most traditional jobs don’t. You set your own hours, choose your clients, and work from anywhere. But if you’re a U.S. citizen or resident alien, it comes with added responsibilities, such as managing taxes, accounting, and business expenses – regardless of where you live or work.

In the United States, self-employed individuals pay self-employment tax (SE tax), which covers both the employee and employer-equivalent portions of Social Security and Medicare. In contrast, W-2 employees only pay the employee portion, while their employers match their contributions.

Accepting cryptocurrency as payment adds another layer of complexity. Since the IRS classifies digital assets as property, self-employed individuals must record each transaction and report any gains or losses on their tax returns. They also need to track the value of each payment in USD upon receipt and calculate any profit or loss when selling, exchanging, or spending the asset.

Filing self-employment taxes may not be as straightforward as it is for W-2 employees, but there are ways to simplify the process. In this guide, we’ll explain the basics of SE tax filing to help you stay compliant and avoid penalties.

What are self-employment taxes?

Self-employed individuals are responsible for paying Social Security and Medicare taxes, just like W-2 employees. However, unlike traditional employees, they must cover both the employee and employer-equivalent portions themselves.

W-2 employees contribute 7.65% of their earnings toward these taxes – 6.2% for Social Security and 1.45% for Medicare – with their employer matching that amount. In contrast, self-employed individuals pay the full 15.3% self-employment tax, which consists of 12.4% for Social Security and 2.9% for Medicare.

To help self-employed individuals understand their tax responsibilities, the IRS provides resources like Publication 334 (Tax Guide for Small Business), which outlines tax requirements, and Publication 583 (Starting a Business and Keeping Records), which explains best practices for record-keeping.

Who pays self-employment taxes? Types of self-employment

Under IRS regulations, anyone earning $400 or more in net self-employment income must file SE taxes. Many professions fall under this requirement, but the most common categories include the following.

Independent contractors

Independent contractors provide services under a contract but are still considered self-employed. They have greater control over their work than W-2 employees, determining how, when, and where they complete tasks.

Gig workers

Gig-based self-employment includes ride-sharing, food delivery, and freelance work, with many workers earning income through platforms like Uber, Lyft, and DoorDash. Unlike traditional employment, these short-term, task-based jobs offer flexibility but often lack benefits such as health insurance, retirement plans, or paid time off.

Independent business owners

An independent business is a privately owned and operated entity not controlled by a larger corporation. Business owners manage their own operations, finances, and strategies, including paying self-employment taxes. Those operating as sole proprietors and general partners must pay self-employment tax on their net earnings.

How do I calculate self-employment tax? Tax estimate for self-employed individuals

Self-employed individuals must pay self-employment tax, which covers Social Security and Medicare contributions. The SE tax rate is 15.3% – 12.4% for Social Security and 2.9% for Medicare.

To calculate your yearly self-employment tax:

1. Determine your net earnings by subtracting ordinary and necessary business expenses from your total self-employment income.
2. Multiply net earnings by 92.35% to account for the deductible employer portion of self-employment tax. 
3. Apply the Social Security tax (12.4%) to the adjusted net earnings up to the Social Security wage base.
4. Apply the Medicare tax (2.9%) to the full adjusted net earnings.
5. Add both amounts together to determine your total self-employment tax, adjusting the Social Security portion if you earn W-2 wages.

Self-employed individuals should file Schedule SE (Form 1040) to report their self-employment tax.

Social Security wage base and additional Medicare tax

The 12.4% Social Security tax only applies to net earnings up to the Social Security wage base, which is $168,600 for 2024 (increasing to $176,100 for 2025). The IRS adjusts this threshold annually. Earnings above this limit aren’t subject to Social Security tax.

However, Medicare tax applies to all net earnings from self-employment, with no income cap. Additionally, high-income earners must pay an extra 0.9% Medicare tax on total wages, compensation, and self-employment income exceeding the following thresholds:

• $250,000 for married filing jointly
• $125,000 for married filing separately
• $200,000 for all other taxpayers

Tax deductions for self-employed

Self-employed individuals don’t benefit from an employer matching their tax contributions, but they may have more deductible expenses. Ordinary and necessary expenses incurred in the course of running a self-employed business may qualify as deductions, reducing taxable income. 

Some of the most common tax deductions for self-employed individuals include the following.

Home office

Expenses related to a home office used for business purposes may qualify as deductions. These can include a percentage of a home mortgage or rent, property taxes, and utilities. There's also a simplified option that allows a set deduction per square foot. However, the space must be used regularly and exclusively for business.

Retirement contributions

Self-employed individuals can contribute to tax-advantaged retirement plans such as SEP IRAs, SIMPLE IRAs, and solo 401(k)s. Contributions to these plans are tax-deductible, helping reduce taxable income in the year of contribution. However, this doesn’t apply to Roth IRA plans, which offer tax benefits when withdrawing funds in retirement rather than providing an upfront deduction.

Business travel and meals

If self-employment involves regular work travel, expenses for transportation (e.g., airfare, car rentals), lodging, and meals may be deductible. However, only 50% of meal costs are deductible, and taxpayers must keep detailed receipts or records to claim these deductions.

Health insurance premiums

In most cases, self-employed individuals can deduct premiums for personal health insurance, including medical, dental, and long-term care coverage for themselves, their spouses, and their dependents. However, the deduction is limited to the net profit from your self-employment activity – excess premiums can’t generate or increase a business loss.

How much is self-employment tax on crypto payments? 

How self-employed individuals calculate tax obligations on crypto depends on several factors, including how they received their digital assets, the coin's fair market value (FMV) at the time of the transaction, and whether they disposed of any of these cryptocurrencies during the year. When someone receives crypto as payment, it qualifies as self-employment income, similar to receiving cash. 

Typically, self-employed individuals may receive a Form 1099-NEC (Nonemployee Compensation) from the payer if the business issuing payment is required to file one and the total compensation (cash or crypto) is at least $600. The total compensation, including the FMV of any cryptocurrency received as payments, is reported in Box 1 ("Nonemployee compensation"), which reflects the amount added to gross income. However, even if no Form 1099-NEC is received, self-employed individuals are still required to report this income.

How crypto sales are taxed

Once cryptocurrency is in a wallet or on an exchange, any subsequent sale, exchange, or use of the asset is considered a taxable disposal, resulting in either a capital gain or loss. Taxpayers calculate the taxable amount by subtracting the cost basis (FMV at the time of receipt) from the amount realized from the disposition. If there’s a profit, the taxpayer owes capital gains tax, but if there’s a net capital loss, they may deduct up to $3,000 per tax year against ordinary income. 

The tax rate depends on how long the cryptocurrency was held and the taxpayer's income bracket. Cryptocurrencies held for one year or less are taxed as ordinary income, while those held for over a year qualify for long-term capital gains rates, which are generally lower.

Tracking and reporting crypto taxes

To track transfers and automatically calculate gains and losses, self-employed individuals can use crypto tax software like CoinTracker. CoinTracker’s Portfolio Tracker consolidates crypto income and transfers into one dashboard. It also populates IRS tax forms with crypto transaction details, making it easy to share with a CPA or integrate with tax solutions like TurboTax and H&R Block.

How to avoid self-employed tax penalties

If you’re self-employed and responsible for managing your own taxes, overlooking deductions or making filing mistakes can easily happen. While consulting a CPA helps you minimize tax liability and avoid penalties, following these best practices will also keep you on the right track.

Keep personal and business expenses separate

Open a dedicated bank account for your business. This makes tracking income, managing expenses, and setting aside estimated tax payments easier. With every payment you receive, automatically transfer a set percentage into this account to ensure you’re prepared when taxes are due.

Keep all receipts for business expenses

The more documentation you have for business expenses, the easier it will be to substantiate deductions under audit. Save all receipts digitally or physically, and consider using expense-tracking software to make sure they remain well-organized and audit-ready.

Track income and expenses diligently

Regularly monitor income and expenses throughout the year to accurately estimate self-employment tax liabilities and plan for upcoming payments. Accounting software like QuickBooks can streamline this process by tracking income and generating financial reports.

Make quarterly estimated tax payments

Unlike W-2 employees, whose employers withhold taxes automatically, self-employed individuals must pay income and self-employment taxes throughout the year. This is done through quarterly estimated tax payments, due on April 15, June 15, September 15, and January 15. These payments ensure taxes are paid throughout the year, reducing the risk of penalties and a large year-end tax bill. To prevent underpayment penalties, it’s best to slightly overestimate these payments based on projected earnings.

File crypto taxes confidently with CoinTracker 

If your business involves cryptocurrency, you need a reliable way to track every transaction. CoinTracker makes it easy. Our Portfolio Tracker connects to your exchange APIs and wallet addresses, instantly displaying your gains, losses, and income for the year. CoinTracker also generates IRS-compliant tax forms that integrate seamlessly with TurboTax and H&R Block.

Get started with a free CoinTracker account today and simplify your crypto tax reporting.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.