A freelance consultant earns $40,000 in net self-employment income and has no other income for the year. She pays her entire federal tax bill in one payment on April 15. Which best describes her situation?
AShe has handled her taxes correctly by paying in full by the filing deadline
BShe may owe an underpayment penalty despite paying everything by April 15, because the IRS requires quarterly estimated payments throughout the year
CShe only owes income tax, since she has no employer to remit SE tax on her behalf
DShe qualifies for a full deduction of all SE taxes paid, eliminating most of her liability
The IRS expects taxes to be paid throughout the year as income is earned, not in a single lump sum in April. Self-employed workers must make quarterly estimated payments (Form 1040-ES) at four deadlines across the year. Failing to do so can trigger an underpayment penalty calculated on each quarter's shortfall — even if the full annual amount is paid by April 15. Paying in April is not the same as paying on time.
Question 2 Multiple Choice
Why do self-employed workers pay a 15.3% SE tax rate rather than the 7.65% that employees see deducted from their paychecks?
ASelf-employment income is taxed at a higher rate because it is treated as business profit rather than wages
BThe IRS adds a surcharge for workers who choose not to have an employer withhold taxes
CSelf-employed workers pay both the employee's share and the employer's matching share of Social Security and Medicare taxes
DThe 15.3% rate bundles federal and state payroll taxes together
Every employee's FICA contribution is actually two equal payments: the 7.65% deducted from the paycheck and an additional 7.65% the employer pays invisibly on the employee's behalf. Together these total 15.3%. As a self-employed worker, you are simultaneously the employee and the employer — so you owe both halves. The 15.3% is not a penalty or surcharge; it is simply the full FICA obligation that corporations split between the paycheck and payroll taxes.
Question 3 True / False
Self-employment tax is owed on net self-employment income even if that income is low enough that the worker owes zero federal income tax.
TTrue
FFalse
Answer: True
SE tax and income tax are two separate obligations calculated independently. SE tax funds Social Security and Medicare; income tax funds general government. A freelancer can have income low enough to owe no income tax (after standard deduction) while still owing SE tax on that same income. Many new freelancers are surprised by this because employees never see SE tax as a distinct line item — it is hidden in employer payroll costs.
Question 4 True / False
The IRS deduction for half of self-employment tax reduces the amount of SE tax you owe.
TTrue
FFalse
Answer: False
This is a common and consequential misunderstanding. The deduction for half of SE tax reduces your adjusted gross income, which in turn reduces the income tax you owe. But the SE tax calculation itself — on Schedule SE — is not affected. You still owe the full 15.3% on 92.35% of your net self-employment income. The deduction provides relief on the income tax side, not the SE tax side.
Question 5 Short Answer
Explain why a self-employed person earning $60,000 net might pay several thousand dollars more in federal taxes than a W-2 employee earning $60,000 in wages — even though both report the same gross income.
Think about your answer, then reveal below.
Model answer: The W-2 employee pays only the employee half of FICA (7.65%) — the employer pays the other half invisibly. The self-employed person pays both halves (15.3%) plus income tax on the same earnings. Even after the above-the-line deduction for half of SE tax (which reduces adjusted gross income slightly), the self-employed person's total federal tax burden is significantly higher. Additionally, the W-2 worker has taxes withheld automatically throughout the year, while the freelancer must also manage quarterly estimated payments or face underpayment penalties.
The key insight is that the employer's share of payroll taxes is a real cost of labor that employees simply never see — it never appears on a pay stub. Self-employed workers are forced to see and pay this cost directly, which is why the SE tax rate appears so high compared to what employees observe on their paychecks.