How Self-Employment Tax Works
When you work as a freelancer, independent contractor, or sole proprietor, you are responsible for both the employer and employee portions of Social Security and Medicare taxes. This combined 15.3% rate is called self-employment (SE) tax. W2 employees only pay 7.65% — their employer pays the other half.
The SE Tax Calculation
Net SE Income = Gross Income − Business Expenses
SE Tax Base = Net SE Income × 0.9235
SE Tax = SE Tax Base × 0.153
SE Deduction = SE Tax ÷ 2 (deducted from AGI)
Federal Tax = Applied to (Net SE − SE Deduction + Other Income − Standard Deduction)Maximizing Your Deductions
Every dollar of legitimate business expenses reduces both your SE tax and income tax. Common deductions include home office, equipment, software, professional development, health insurance premiums (above-the-line deduction), and retirement contributions (SEP-IRA allows up to 25% of net SE income).
Quarterly Estimated Taxes
Unlike employees who have taxes withheld, self-employed individuals must pay taxes quarterly. Missing a payment or paying too little can result in IRS underpayment penalties. The safe harbor rule: pay at least 100% of last year's tax liability (110% if your prior year AGI exceeded $150,000) to avoid penalties.
Frequently Asked Questions
Self-employment (SE) tax is Social Security and Medicare taxes for self-employed individuals. The rate is 15.3% (12.4% Social Security + 2.9% Medicare) on 92.35% of net self-employment earnings. W2 employees pay half (7.65%) with employers paying the other half — self-employed pay both sides.
Step 1: Multiply net SE earnings × 0.9235 to get the SE tax base. Step 2: Multiply the base × 0.153 to get SE tax. Step 3: You can deduct half of the SE tax (the employer equivalent portion) from your gross income when calculating federal income tax.
You can deduct 50% of your SE tax as an above-the-line deduction (Schedule SE). This reduces your adjusted gross income (AGI), which in turn reduces your federal income tax. It does not reduce SE tax itself.
Yes — if you expect to owe $1,000 or more in taxes for the year, you must pay quarterly estimated taxes. Due dates are April 15, June 15, September 15, and January 15 of the following year. Failure to pay can result in underpayment penalties.
Common deductible SE expenses: home office, business equipment, vehicle use, professional services (accounting, legal), software subscriptions, business insurance, education, travel, and half of health insurance premiums. Deductions reduce your net SE income and therefore your SE tax.
For 2026, the Social Security wage base is $176,100. The 12.4% Social Security tax only applies to earnings up to this limit. The 2.9% Medicare tax applies to all earnings with no cap. High earners also pay an additional 0.9% Medicare surtax on earnings above $200,000 (single) or $250,000 (married).
States with no income tax: Alaska, Florida, Nevada, New Hampshire (only on dividends/interest), South Dakota, Tennessee, Texas, Washington, Wyoming. Living in one of these states can significantly reduce your total tax burden as a self-employed person.
An S-Corp election can reduce SE tax by allowing you to split income between a salary (subject to payroll taxes) and distributions (not subject to SE tax). This strategy typically saves money once net income exceeds $50,000–$80,000/year. Consult a CPA to evaluate.