What self-employment tax is and why it exists
An employee and their employer each pay 7.65 percent of wages into Social Security and Medicare. A self-employed person is both, so they pay both halves: 12.4 percent for Social Security and 2.9 percent for Medicare, 15.3 percent in total. That is self-employment tax, imposed by IRC §1401 and computed on Schedule SE.
It is not income tax and it does not behave like income tax. The standard deduction does not reduce it. Itemised deductions do not reduce it. Tax credits generally do not offset it. The only thing that reduces self-employment tax is a lower net profit, which means legitimate business expenses are worth more to a sole trader than to an employee — every deductible dollar saves the marginal income tax rate plus about 14.1 points.
It is also frequently the larger of the two taxes at modest profit levels. A single filer with $50,000 of Schedule C profit and no other income owes about $7,065 of self-employment tax against roughly $3,400 of federal income tax after the standard deduction. Anyone budgeting only for income tax will be short.
The trade is that these are contributions, not pure taxes. Self-employment earnings build Social Security credits and count toward the earnings record that determines your eventual benefit — which is exactly why the $400 threshold matters and why reporting profit accurately cuts both ways.
The four steps of Schedule SE
Step one: multiply net profit by 0.9235. This 7.65 percent haircut exists so a sole trader is treated like an employee, whose wages are already net of the employer's half of FICA. Without it, the self-employed would be paying tax on the money used to pay the tax. The resulting figure is called net earnings from self-employment.
Step two: apply 12.4 percent up to the Social Security wage base. The base is adjusted annually — $184,500.000000 for 2026 and $176,100.000000 for 2025. Crucially, W-2 wages consume the base first. Someone with $184,500.000000 of wages has no Social Security base left, so their business profit is charged Medicare only.
Step three: apply 2.9 percent to all net earnings. The Medicare portion has no ceiling, so it keeps running on every dollar of profit however large. Above $200,000 of combined wages and net earnings ($250,000 joint, $125,000 married filing separately) a further 0.9 percent additional Medicare tax applies, computed on Form 8959. That extra 0.9 percent is not halved and is not deductible.
Step four: deduct half. Under IRC §164(f) you deduct 50 percent of the Schedule SE tax as an above-the-line adjustment on Schedule 1. It reduces income tax; it does not reduce the self-employment tax itself. Feed the figure into the adjustments field of the taxable income calculator.
One statutory floor sits underneath all of this: if net earnings are below $400, no self-employment tax is due and Schedule SE is not filed. Because of the 0.9235 factor, that corresponds to about $433 of net profit.
Worked example: $80,000 of Schedule C profit in 2026
A freelance consultant reports $80,000 on line 31 of Schedule C, has no W-2 wages, and files as single.
- Net earnings. 80,000 × 0.9235 = $73,880.00.
- Social Security portion. Net earnings are below the $184,500.000000 wage base, so all of it is subject: 73,880 × 0.124 = $9,161.12.
- Medicare portion. 73,880 × 0.029 = $2,142.52.
- Schedule SE tax. 9,161.12 + 2,142.52 = $11,303.64. As a check, 73,880 × 0.153 = 11,303.64.
- Additional Medicare tax. Wages plus net earnings are $73,880, well under $200,000, so $0.
- Deductible half. 11,303.64 ÷ 2 = $5,651.82, which goes on Schedule 1 as an adjustment to income.
- Share of profit. 11,303.64 ÷ 80,000 = 14.13 percent — the effective rate of a 15.3 percent tax after the 0.9235 adjustment.
Now add $150,000 of W-2 wages from a day job. The wages use $184,500.000000 − 150,000 = $34,500 short of the base, so only $34,500 of the net earnings faces the 12.4 percent rate: 34,500 × 0.124 = $4,278.00. The Medicare portion is unchanged at $2,142.52, giving $6,420.52 of Schedule SE tax — $4,883.12 less than the same profit standing alone. The additional Medicare tax now applies, because 150,000 + 73,880 = $223,880 exceeds $200,000: 0.009 × $23,880 = $214.92.
How to read the result
Set aside the tax as you earn it, not in April. Self-employment income carries no withholding, so the money has to be paid in quarterly instalments. A common rule of thumb is to reserve 25 to 30 percent of profit for federal self-employment and income tax combined, then adjust once you have run the numbers — size the actual instalments with the quarterly estimated tax calculator.
The effective rate on profit is 14.13 percent below the wage base, then it falls. That is 15.3 × 0.9235. Above the wage base the marginal rate on further profit drops to 2.9 × 0.9235 = 2.678 percent, so the average rate declines as profit grows. The chart above shows exactly where the kink sits for your year.
W-2 wages are counted first, and that is in your favour. If you have a salaried job as well as a business, the wage base is used up by the salary before your profit is tested, so the Social Security portion on the business is reduced or eliminated. If both employers over-withhold across two jobs you can also reclaim excess Social Security tax on Form 1040.
The deductible half is worth your marginal income tax rate, not 50 percent of the tax. On $11,303.64 of SE tax, the $5,651.82 adjustment saves 5,651.82 × your marginal rate — $1,243 at 22 percent. Do not treat the deduction as halving the tax.
An S corporation changes the arithmetic, not necessarily for the better. Wages paid to an owner-employee carry FICA; distributions above a reasonable salary do not. The saving is real but so are the payroll filings, the reasonable compensation requirement and the effect on retirement plan limits and future Social Security benefits.
Self-employment tax by net profit, tax year 2026
| Net profit | Net earnings (92.35%) | Social Security 12.4% | Medicare 2.9% | Total SE tax | Share of profit |
|---|---|---|---|---|---|
| $25,000.000000 | $23,087.50 | $2,862.85 | $669.54 | $3,532.39 | 14.13% |
| $50,000.000000 | $46,175.00 | $5,725.70 | $1,339.08 | $7,064.77 | 14.13% |
| $75,000.000000 | $69,262.50 | $8,588.55 | $2,008.61 | $10,597.16 | 14.13% |
| $100,000.000000 | $92,350.00 | $11,451.40 | $2,678.15 | $14,129.55 | 14.13% |
| $150,000.000000 | $138,525.00 | $17,177.10 | $4,017.23 | $21,194.32 | 14.13% |
| $184,500.000000 | $170,385.75 | $21,127.83 | $4,941.19 | $26,069.02 | 14.13% |
| $200,000.000000 | $184,700.00 | $22,878.00 | $5,356.30 | $28,234.30 | 14.12% |
| $300,000.000000 | $277,050.00 | $22,878.00 | $8,034.45 | $30,912.45 | 10.30% |
No W-2 wages assumed. Every row is produced by the same calculation the calculator runs, including the 0.9235 adjustment and the wage base cap on the Social Security column.
Mistakes that change the number
- Applying 15.3 percent to gross revenue. The base is net profit after business expenses, then reduced by 7.65 percent. On $80,000 of profit that is the difference between $12,240 and $11,303.64.
- Forgetting the 0.9235 factor. It cuts the tax by 7.65 percent of itself — $865 on the worked example.
- Ignoring W-2 wages when the wage base is in play. Wages fill the Social Security base first, and leaving them out can overstate the tax by thousands.
- Assuming the standard deduction reduces it. It does not. A filer with no income tax liability at all can still owe several thousand dollars of self-employment tax.
- Deducting the whole tax instead of half. Only 50 percent of the Schedule SE figure is an adjustment, and the 0.9 percent additional Medicare tax is not deductible at all.
- Including income that is not self-employment income. Rental income reported on Schedule E, capital gains, interest, dividends and most passive partnership income are not subject to self-employment tax. Statutory employees, whose W-2 box 13 is ticked, file Schedule C but pay FICA rather than SE tax.
- Overlooking a second earner. On a joint return each spouse computes self-employment tax separately on their own earnings, each with their own wage base and their own $400 threshold.
Where 92.35 percent comes from
An employee earning $100 of wages costs the employer $107.65, and the employee is taxed on the $100. A sole trader with $107.65 of profit has no employer, so to be treated the same way their taxable base is reduced to $100 — that is, multiplied by 100 ÷ 107.65 = 0.928937… In practice the statute rounds it to 0.9235, which is 1 − 0.0765, the employer share expressed as a fraction of the pre-tax figure rather than the post-tax one. The two differ slightly, and Congress chose the simpler form. The practical effect is that the headline 15.3 percent rate becomes 14.13 percent of profit.
Where this fits with the rest of your return
The order of operations matters and it contains a loop. Compute net profit, run Schedule SE on it, take half of the resulting tax as an above-the-line adjustment, and only then build taxable income for the income tax. The adjustment lowers income tax but not self-employment tax, so the two calculations do not need to be iterated — run SE tax first, income tax second.
Deductions that reduce net profit are therefore the most valuable ones available to you. The home office deduction and the business mileage deduction both come off Schedule C, so they save income tax and self-employment tax together. A traditional IRA contribution, by contrast, is an adjustment on Schedule 1 and saves income tax only.
Once you know the SE tax figure, it belongs in the other-taxes line of the income tax refund estimator and in the projected liability used by the quarterly estimated tax calculator. The marginal vs effective tax rate calculator will show you the combined marginal rate a further dollar of profit meets.
A closing note on what the tax buys. Forty quarters of coverage qualify you for Social Security retirement benefits, and the benefit formula uses your highest 35 years of indexed earnings. Under-reporting profit reduces the tax now and the benefit later, and it also reduces disability coverage, which is calculated from recent earnings and is the part self-employed people most often forget they are buying.