What is Self-Employment Tax?
Self-employment tax is the Social Security and Medicare tax paid by freelancers, independent contractors, and small business owners. While W-2 employees have these taxes withheld from their paychecks (and employers pay half), self-employed individuals must pay the entire amount themselves—a whopping 15.3% on top of regular income tax!
⚠️ The Self-Employment Tax Shock:
Many new freelancers are shocked when they realize they owe not only income tax (10%-37%) but also an additional 15.3% self-employment tax. On $100,000 of self-employment income, that's $15,300 in SE tax PLUS income tax! This guide will show you how to calculate, minimize, and pay this tax correctly.
Breaking Down the 15.3% Self-Employment Tax
The 15.3% self-employment tax consists of two parts:
| Tax Type | Rate | 2026 Wage Base | Purpose |
|---|---|---|---|
| Social Security (OASDI) | 12.4% | First $168,600 | Retirement & disability benefits |
| Medicare (HI) | 2.9% | No limit (all income) | Health insurance age 65+ |
| Additional Medicare Tax | 0.9% | Income over $200K/$250K | High earners surtax |
| Total SE Tax: 15.3% (12.4% + 2.9%) | |||
💰 Real-World SE Tax Calculation Examples
Example 1: Freelance Designer earning $60,000
- Net self-employment income: $60,000
- SE tax base (92.35% of income): $55,410
- Social Security: $55,410 × 12.4% = $6,871
- Medicare: $55,410 × 2.9% = $1,607
- Total SE tax: $8,478
- Deduction for half: $4,239 (reduces taxable income)
Example 2: Independent Contractor earning $200,000
- Net self-employment income: $200,000
- SE tax base (92.35%): $184,700
- Social Security (capped at $168,600): $168,600 × 12.4% = $20,906
- Medicare (all income): $184,700 × 2.9% = $5,356
- Additional Medicare (over $200K): $0 × 0.9% = $0
- Total SE tax: $26,262
- Deduction for half: $13,131
Example 3: Consultant earning $300,000
- Net self-employment income: $300,000
- SE tax base (92.35%): $277,050
- Social Security (capped): $168,600 × 12.4% = $20,906
- Medicare: $277,050 × 2.9% = $8,034
- Additional Medicare (over $200K): $77,050 × 0.9% = $693
- Total SE tax: $29,633
- Deduction for half: $14,817
💡 Why 92.35%?
You only pay SE tax on 92.35% of your net income because this mirrors how W-2 employees are treated—they don't pay FICA taxes on the employer's portion (7.65%). The calculation: 100% - (15.3% × 50%) = 92.35%
Schedule C: Reporting Business Income
Self-employed individuals report their business income and expenses on Schedule C (Form 1040). The net profit from Schedule C is subject to both income tax and self-employment tax.
Schedule C Income:
- Freelance/consulting income (1099-NEC)
- Cash payments
- Business income
- Other self-employment income
Schedule C Deductions (Ordinary & Necessary Business Expenses):
- Advertising: Website, business cards, online ads
- Car & truck expenses: Business mileage at $0.67/mile (2026)
- Office expenses: Supplies, postage, software subscriptions
- Legal & professional fees: Accountant, attorney, consultants
- Insurance: Business liability, professional liability
- Travel: Airfare, hotels, meals (50% deductible)
- Utilities: Business phone, internet
- Depreciation: Equipment, computers, furniture
Two methods to claim home office deduction:
1. Simplified Method:
- $5 per square foot (max 300 sq ft)
- Maximum deduction: $1,500
- No depreciation, easy calculation
2. Regular Method:
- Calculate % of home used for business
- Deduct that % of: mortgage interest, property taxes, insurance, utilities, repairs, depreciation
- More complex but often larger deduction
Requirements:
- Exclusive and regular use for business
- Principal place of business
- Must have profit motive (not hobby)
Standard Mileage Rate (2026):
- Business mileage: $0.67 per mile
- Keep mileage log (date, destination, business purpose, miles)
- Cannot use for vehicles used for hire
Actual Expense Method:
- Calculate business use % of vehicle
- Deduct that % of: gas, insurance, repairs, depreciation, lease payments
- Must keep detailed records of all expenses
- Generally better for expensive vehicles
- Business meals: 50% deductible (with clients, prospects)
- Entertainment: Generally NOT deductible (changed in 2018)
- Travel meals: 50% deductible (while traveling for business)
- Office snacks/coffee: 50% deductible
- Company parties: 100% deductible (if for all employees)
Documentation required: Date, amount, business purpose, attendees
💰 How Deductions Reduce SE Tax:
Example: Freelancer with $80,000 gross income
- Gross income: $80,000
- Business expenses: -$15,000
- Net profit (Schedule C): $65,000
- SE tax on $65,000: $9,180
Without deductions:
- SE tax on $80,000: $11,304
Tax savings from $15,000 in deductions: $2,124!
Quarterly Estimated Tax Payments
Since self-employed individuals don't have taxes withheld from their income, you must pay estimated taxes quarterly to avoid penalties.
⚠️ Penalties for Underpayment
If you don't pay enough estimated tax, you'll owe:
- Underpayment penalty: Interest on amount owed (currently ~8% annual)
- Penalty applies even if you get a refund when you file!
- Can be waived in certain circumstances (disaster, casualty, retirement)
2026 Quarterly Payment Due Dates:
| Quarter | Income Period | Due Date |
|---|---|---|
| Q1 | Jan 1 - Mar 31 | April 15, 2026 |
| Q2 | Apr 1 - May 31 | June 15, 2026 |
| Q3 | Jun 1 - Aug 31 | September 15, 2026 |
| Q4 | Sep 1 - Dec 31 | January 15, 2027 |
How Much to Pay (Safe Harbor Rules):
✅ Avoid Penalties with Safe Harbor
Pay the LESSER of:
- 90% of current year tax (total income + SE tax), OR
- 100% of prior year tax (110% if AGI over $150K)
Example calculation for $100,000 self-employment income:
- Estimated SE tax: ~$14,130
- Estimated income tax: ~$12,000 (single, standard deduction)
- Total estimated tax: $26,130
- Quarterly payment: $26,130 ÷ 4 = $6,533
💡 Pro Tips for Estimated Payments:
- Set aside 25-30% of income: Transfer to separate savings account
- Pay via IRS Direct Pay: Free, instant confirmation
- Use EFTPS for auto-payments: Schedule all 4 quarters at once
- Adjust as you go: If Q1 was slow, pay less in Q2 (use Form 2210)
- Consider annualized method: If income varies significantly by quarter
Deducting Half of Your SE Tax
Here's the good news: You can deduct 50% of your self-employment tax from your taxable income! This partially offsets the pain of paying both halves of Social Security and Medicare.
💰 SE Tax Deduction Calculation
Example: $80,000 self-employment income
- Net self-employment income: $80,000
- Multiply by 92.35%: $73,880 (SE tax base)
- SE tax (15.3%): $11,304
- Deduction (50% of SE tax): $5,652
- Enter on Schedule 1, Line 15
Tax savings from deduction:
- If in 22% bracket: $5,652 × 22% = $1,243 saved
- If in 24% bracket: $5,652 × 24% = $1,356 saved
Net SE tax after deduction benefit: $11,304 - $1,243 = $10,061 effective SE tax
📋 Where to Report:
- Form 1040, Schedule SE: Calculate SE tax
- Form 1040, Schedule 1, Line 15: Deduct 50% of SE tax
- This is "above-the-line" deduction: Reduces AGI (better than itemized)
- No itemizing needed: Can take standard deduction AND this deduction
Self-Employed Health Insurance Deduction
Self-employed individuals can deduct 100% of health insurance premiums for themselves, spouse, and dependents—another "above-the-line" deduction that reduces AGI!
What Qualifies:
- Health insurance premiums (medical, dental, vision)
- Long-term care insurance (limited by age)
- Medicare premiums (if self-employed)
- Premiums for spouse and dependents
Requirements:
- Must show net profit on Schedule C
- Cannot deduct more than net profit
- Cannot claim if eligible for employer plan (yours or spouse's)
- Premiums must be paid with after-tax dollars (not pre-tax through marketplace subsidy)
💰 Health Insurance Deduction Example
Self-employed consultant with family:
- Annual health insurance premiums: $18,000
- Dental insurance: $2,400
- Vision insurance: $600
- Total insurance: $21,000
Tax savings:
- Deduction: $21,000
- Tax bracket: 24%
- Federal tax savings: $21,000 × 24% = $5,040
- Also reduces SE tax base slightly
Effective cost of insurance: $21,000 - $5,040 = $15,960
📋 Where to Report:
- Form 1040, Schedule 1, Line 17: Self-employed health insurance deduction
- Do NOT include on Schedule C (reduces income tax but not SE tax)
- This is "above-the-line" deduction (reduces AGI)
Self-Employed Retirement Plans
Self-employed individuals have access to powerful retirement plans with much higher contribution limits than traditional IRAs!
| Plan Type | 2026 Contribution Limit | Deadline | Best For |
|---|---|---|---|
| SEP IRA | Up to 25% of net earnings (max $69,000) | Tax return deadline + extensions | Simple setup, solo business owners |
| Solo 401(k) | $23,000 + 25% of compensation (max $69,000 total, $76,500 if 50+) | Dec 31 (employee); Tax deadline (employer) | Maximum contributions, high earners |
| SIMPLE IRA | $16,000 ($19,500 if 50+) | Dec 31 for employee; Jan 30 for employer match | Small businesses with employees |
| Traditional IRA | $7,000 ($8,000 if 50+) | April 15 following tax year | Simple, anyone can open |
SEP IRA Deep Dive:
Simplified Employee Pension (SEP) IRA
- Contribution: Up to 25% of net self-employment earnings
- 2026 maximum: $69,000
- Calculation: (Net profit - 1/2 SE tax) × 0.20 = contribution
- Deadline: Tax return deadline including extensions (October 15)
- Setup: Easy, low cost, no annual filing required
Example: Consultant with $150,000 net profit
- Net profit: $150,000
- Less 1/2 SE tax: -$10,613
- Net earnings: $139,387
- SEP contribution (20%): $27,877
- Tax savings (24% bracket): $6,690
Solo 401(k) Deep Dive:
💰 Solo 401(k): Maximum Contributions
Two-part contribution structure:
1. Employee Deferral:
- Up to $23,000 ($30,500 if age 50+)
- Can be Roth or Traditional
- Must be made by December 31
2. Employer Profit-Sharing:
- Up to 25% of compensation
- Can be made until tax deadline + extensions
Total combined limit: $69,000 ($76,500 if 50+)
Example: Freelancer age 52 with $200,000 net profit
- Employee deferral: $30,500 (includes $7,500 catch-up)
- Employer contribution: ~$36,800
- Total contribution: $67,300
- Tax savings (32% bracket): $21,536
✅ Retirement Plan Strategy Tips:
- SEP IRA: Best if you want simplicity and flexibility (can skip years)
- Solo 401(k): Best for maximum contributions, includes loan option
- Roth option: Solo 401(k) can have Roth contributions (pay tax now, grow tax-free)
- Deadline planning: Solo 401(k) employee portion due Dec 31, plan ahead!
Qualified Business Income (QBI) Deduction: 20% Off!
The QBI deduction (Section 199A) allows self-employed individuals to deduct up to 20% of qualified business income—a massive tax break that can save thousands!
💰 QBI Deduction Basics
What it is:
- Deduction of up to 20% of qualified business income
- Reduces taxable income (not business income)
- "Above-the-line" deduction available to all filers
- Can take standard deduction AND QBI deduction
2026 Income Thresholds:
- Single: Full deduction if taxable income under $191,950
- Married: Full deduction if taxable income under $383,900
- Phase-out range: $50K for single, $100K for married
- Limitations apply above thresholds for certain businesses
QBI Calculation Examples:
Example 1: Simple scenario (under threshold)
- Freelance graphic designer
- Schedule C net profit: $100,000
- Less 1/2 SE tax: -$7,065
- Less self-employed health insurance: -$12,000
- Less standard deduction: -$14,600
- Taxable income: $66,335
- QBI deduction: $100,000 × 20% = $20,000
- New taxable income: $46,335
- Tax savings (22% bracket): $4,400
Example 2: High earner scenario
- Independent IT consultant
- Schedule C net profit: $250,000
- Total taxable income: $220,000 (single)
- Above $191,950 threshold (in phase-out range)
- QBI deduction (partial): ~$30,000 (after limitations)
- Tax savings (32% bracket): $9,600
⚠️ Specified Service Trade or Business (SSTB) Limitations
Above income thresholds, these professions face limitations:
- Health, law, accounting, actuarial sciences
- Performing arts, consulting, athletics
- Financial/brokerage services
- Investing, trading
- If SSTB and over threshold, deduction may be reduced or eliminated
Top 10 Self-Employment Tax-Saving Strategies
1-5: Essential Strategies
- Track every business expense: Use accounting software
- Maximize retirement contributions: SEP IRA or Solo 401(k)
- Claim home office deduction: Can save $1,000-$5,000+
- Deduct health insurance: 100% deductible above-the-line
- Use vehicle strategically: Standard mileage or actual expense
6-10: Advanced Strategies
- Section 179 depreciation: Deduct equipment immediately
- Hire your kids: Shift income to lower brackets
- Form an S-Corp: Reduce SE tax (if profit > $60K)
- Bunch expenses: Pay January expenses in December
- Claim QBI deduction: 20% of business income
S-Corporation Strategy (Advanced):
💡 When to Consider S-Corp Election
How it works:
- Pay yourself "reasonable salary" (subject to SE tax)
- Remaining profit distributed as dividends (NOT subject to SE tax)
- Can save significant SE tax
Example: Consultant with $150,000 profit
As sole proprietor:
- SE tax on $150,000: ~$21,195
As S-Corp:
- Salary: $80,000
- SE tax (only on salary): ~$11,304
- Dividend: $70,000 (no SE tax)
- SE tax savings: $9,891!
Considerations:
- Additional costs: payroll processing, tax return (1120-S)
- Must pay "reasonable salary" (IRS scrutiny)
- Generally worth it if profit > $60,000-$80,000
- Consult CPA before electing S-Corp status
Your Self-Employment Tax Action Plan
Immediate Actions:
- ✅ Set up accounting software (QuickBooks, FreshBooks, Wave)
- ✅ Open separate business bank account
- ✅ Create system to track all business expenses
- ✅ Set aside 25-30% of income for taxes
- ✅ Calculate and pay quarterly estimated taxes
- ✅ Use our Self-Employment Tax Calculator
Quarterly Tasks:
- ✅ Review income and expenses
- ✅ Pay estimated taxes (April 15, June 15, Sept 15, Jan 15)
- ✅ Adjust payments if income changed
- ✅ Review retirement contribution progress
Year-End Tasks:
- ✅ Maximize deductible expenses before Dec 31
- ✅ Make Solo 401(k) employee contributions by Dec 31
- ✅ Consider equipment purchases (Section 179)
- ✅ Review home office usage
- ✅ Prepare for tax filing (organize receipts)