You worked hard for that income. Then you see the self-employment tax line on your return and wonder if you read it wrong. You didn’t. Self-employment tax takes 15.3% right off the top of your net earnings. That’s $15,300 on every $100,000 of profit before you even get to income tax.
Most sole proprietors accept this as unavoidable. It’s not. The self-employment tax exists because you’re paying both the employer and employee portions of Social Security and Medicare. But the calculation has nuances that create real opportunities to reduce what you owe.
How is self-employment tax calculated?
Self-employment tax equals 15.3% of 92.35% of your net self-employment earnings. The rate breaks down to 12.4% for Social Security (on income up to $184,500 in 2026) and 2.9% for Medicare (on all earnings, no cap). For $100,000 in net profit, you’d owe approximately $14,130 in SE tax. You can deduct half of this amount from your adjusted gross income.
Key Takeaways
- Self-employment tax rate is 15.3% – 12.4% Social Security + 2.9% Medicare, applied to 92.35% of net earnings
- Social Security cap for 2026 is $184,500 – Only the first $184,500 of combined wages and self-employment income is subject to the 12.4% Social Security portion
- You get a 50% deduction – Half of your self-employment tax is deductible as an above-the-line adjustment, reducing your AGI
- S-Corp election can save $6,000+ annually – At $100,000 net income, proper S-Corp structuring typically saves $5,000-$8,000 per year
- Additional Medicare tax applies above $200,000 – An extra 0.9% Medicare surtax hits single filers above $200,000 ($250,000 for married filing jointly)
Table of Contents
What Is Self-Employment Tax?
Self-employment tax is the Social Security and Medicare contribution that self-employed individuals pay on their business income. When you work for an employer, you split these taxes 50/50. Your employer pays 7.65%, and you pay 7.65% through payroll withholding.
When you’re self-employed, you pay both halves. That’s where the 15.3% comes from.
The IRS requires this payment from anyone with net self-employment earnings of $400 or more. It applies whether you’re a freelancer, independent contractor, gig worker, or sole proprietor running a business.
Here’s what catches people off guard: self-employment tax is separate from income tax. You’ll calculate and pay both. So your total tax burden on self-employment income is self-employment tax (15.3% of 92.35%) plus your marginal income tax rate.
2026 Self-Employment Tax Rates
The self-employment tax rate has two components with different caps:
| Component | Rate | 2026 Income Cap | Notes |
|---|---|---|---|
| Social Security | 12.4% | $184,500 | Combined wages + SE income |
| Medicare | 2.9% | No cap | Applies to all earnings |
| Additional Medicare | 0.9% | Above threshold | Single: $200K, MFJ: $250K |
| Total | 15.3% | (varies) | Plus 0.9% if over threshold |
The $184,500 Social Security wage base for 2026 represents a significant increase from prior years. This means high-income self-employed individuals will pay Social Security tax on more of their earnings.
If you also have W-2 income: Your employer already withholds Social Security tax on those wages. The $184,500 cap applies to your combined wage and self-employment income. If your W-2 wages exceed $184,500, you won’t owe the Social Security portion of SE tax on your self-employment income.
How to Calculate Self-Employment Tax
The calculation has a built-in adjustment that many people miss.
Step 1: Calculate your net self-employment earnings
Start with gross income minus business expenses. This is the profit reported on your Schedule C.
Step 2: Multiply by 92.35%
This adjustment accounts for the fact that employers can deduct their half of FICA taxes as a business expense. You get a similar benefit. Multiply your net profit by 0.9235.
Step 3: Apply the 15.3% rate
Multiply the result by 0.153 to get your self-employment tax (up to the Social Security wage base).
Example Calculation
Net self-employment income: $100,000
- $100,000 × 0.9235 = $92,350 (taxable SE earnings)
- $92,350 × 0.124 = $11,451 (Social Security portion)
- $92,350 × 0.029 = $2,678 (Medicare portion)
- Total SE tax: $14,129
Your deductible half: $7,065 (reduces AGI)
When You Exceed the Social Security Wage Base
If your combined wages and self-employment earnings exceed $184,500, the calculation changes. You only owe the 2.9% Medicare tax on earnings above that threshold.
Example: You have $150,000 in W-2 wages and $100,000 in self-employment income.
- Social Security tax applies to only $34,500 of SE income ($184,500 – $150,000)
- Medicare tax applies to all $100,000 of SE income
- Total SE tax is lower than if all income were self-employment
This is one reason high-income business owners with significant W-2 income sometimes keep their side businesses as sole proprietorships rather than electing S-Corp status.
The 50% Self-Employment Tax Deduction
You can deduct half of your self-employment tax when calculating adjusted gross income. This is an above-the-line deduction, meaning you get it whether or not you itemize.
The deduction appears on Schedule 1 (Form 1040), Line 15. It reduces your AGI, which affects:
- Income tax owed
- Eligibility for other deductions and credits
- Student loan repayment calculations
- Health insurance premium tax credits
What it doesn’t affect: The deduction doesn’t reduce your self-employment tax itself. You still calculate and pay the full amount. The deduction only reduces your income tax.
6 Strategies to Reduce Self-Employment Tax
1. Maximize Business Deductions
Every dollar of business expense you deduct reduces your self-employment tax by about 14 cents (15.3% × 92.35%).
The most overlooked Schedule C deductions for reducing SE tax:
- Home office deduction – Up to $1,500 using simplified method, or actual expenses for regular method
- Vehicle expenses – 72.5 cents per mile for 2026, or actual expenses
- Health insurance premiums – 100% deductible for self-employed individuals
- Retirement plan contributions – Reduces SE income and income tax
- Professional development – Courses, certifications, industry memberships
Don’t overlook smaller deductions. Office supplies, software subscriptions, and professional services add up. $5,000 in additional legitimate deductions saves roughly $700 in SE tax plus your marginal income tax rate on that amount.
2. Elect S-Corp Status
This is the most significant SE tax reduction strategy for sole proprietors earning $60,000 or more in net profit.
When you elect S-Corp status for your business, you split your income into two categories:
- Reasonable salary (subject to payroll taxes)
- Distributions (not subject to SE or payroll taxes)
Example at $150,000 net profit:
| Structure | SE/Payroll Tax | Savings |
|---|---|---|
| Sole Prop | ~$20,078 | – |
| S-Corp ($70K salary) | ~$10,710 | ~$9,368 |
The catch: “Reasonable compensation” matters. The IRS expects you to pay yourself what you’d pay someone else to do your job. Too-low salaries trigger audits. SDO CPA helps clients navigate S-Corp reasonable compensation requirements to maximize savings without audit risk.
Use our S-Corp Tax Calculator to estimate your potential savings.
3. Contribute to Retirement Plans
Retirement contributions reduce your self-employment income, directly lowering SE tax.
Options for self-employed individuals:
| Plan | 2026 Contribution Limit | Best For |
|---|---|---|
| SEP-IRA | 25% of net SE income (up to $70,000) | Simplicity, high income |
| Solo 401(k) | $23,500 employee + ~25% employer | Maximizing contributions |
| SIMPLE IRA | $16,500 (+ $3,500 catch-up if 50+) | Lower income levels |
A Solo 401(k) offers the most flexibility. You can contribute as both employee and employer, potentially sheltering $70,000+ from both income tax and self-employment tax at high income levels.
4. Hire Your Spouse
If your spouse helps with your business, putting them on payroll creates legitimate business expenses that reduce your SE tax base.
The wages you pay are deductible. Your spouse gets Social Security credits. And if you provide health insurance through the business, those premiums become deductible for your family.
This strategy works best when your spouse genuinely works in the business and the compensation is reasonable for the work performed.
5. Time Income and Expenses Strategically
If you’re approaching the Social Security wage base ($184,500), timing matters.
Accelerate deductions into years when SE income is high to maximize the tax benefit.
Defer income when possible if you’ll exceed the Social Security cap anyway. Income above the cap only faces the 2.9% Medicare portion.
This is particularly relevant for businesses with variable income or those expecting a significant change in structure (like S-Corp election) in the following year.
6. Consider a Qualified Joint Venture (Married Couples)
If you run a business with your spouse, filing as a qualified joint venture lets you each report your share of income on separate Schedule Cs. Both spouses build Social Security credits.
This doesn’t reduce total SE tax, but it does improve Social Security benefits for the spouse who might otherwise have no self-employment credits.
Self-Employment Tax vs. Income Tax
These are two different taxes calculated separately:
| Tax Type | What It’s On | Rate | Deductible |
|---|---|---|---|
| Self-Employment Tax | 92.35% of net SE earnings | 15.3% (up to SS cap) | 50% deductible on 1040 |
| Income Tax | AGI minus deductions | 10-37% (2026 brackets) | No |
Combined tax burden example at $100,000 net SE income (single filer, no other income):
- SE tax: ~$14,129
- SE tax deduction: ~$7,065
- Taxable income: ~$77,835 (after standard deduction and SE deduction)
- Estimated income tax: ~$12,000
- Total tax burden: ~$26,129 (26.1% effective rate)
This is why tax planning strategies matter so much for self-employed individuals. You’re paying both taxes on the same income.
When S-Corp Makes Sense (and When It Doesn’t)
The S-Corp election question comes down to math and compliance costs.
S-Corp typically makes sense when:
- Net self-employment income exceeds $60,000-$80,000
- Tax savings outweigh additional compliance costs ($1,500-$3,000 annually)
- You can pay yourself reasonable compensation
- You plan to stay in business for multiple years
S-Corp may not make sense when:
- Income is variable or uncertain
- You have significant W-2 income that already hits the SS wage base
- Business has high liability exposure (S-Corp has less flexibility than LLC)
- You’re in a community property state with specific complications
Read the full comparison in our Sole Proprietor vs LLC vs S-Corp guide.
Filing Requirements: Schedule SE
Self-employment tax is calculated on Schedule SE (Form 1040). The form has two sections:
Section A (Short Schedule SE): For straightforward situations. Most sole proprietors use this.
Section B (Long Schedule SE): Required for specific situations including church employee income, maximum SE tax calculations, or optional methods of calculating SE earnings.
Schedule SE flows to Schedule 2, which adds to your total tax on Form 1040. The deductible portion (50% of SE tax) goes on Schedule 1 as an adjustment to income.
Estimated Tax Payments
Self-employment tax is part of your estimated tax obligation. The IRS expects payment quarterly:
| Payment | Due Date | For Income Earned |
|---|---|---|
| Q1 | April 15 | Jan – Mar |
| Q2 | June 15 | Apr – May |
| Q3 | September 15 | Jun – Aug |
| Q4 | January 15 (next year) | Sep – Dec |
Underpayment penalties apply if you don’t pay at least 90% of current year tax or 100% of prior year tax (110% if AGI exceeded $150,000).
Use our quarterly tax planning checklist to stay on track.
Frequently Asked Questions
How much is self-employment tax on $50,000?
On $50,000 net self-employment income: $50,000 × 92.35% × 15.3% = $7,065. You can deduct $3,533 from your adjusted gross income.
Do I pay self-employment tax on S-Corp distributions?
No. S-Corp distributions are not subject to self-employment tax or payroll tax. Only your W-2 salary from the S-Corp is subject to payroll taxes.
Can I avoid self-employment tax by forming an LLC?
Not automatically. A single-member LLC is taxed exactly like a sole proprietorship. You’d need to elect S-Corp or C-Corp tax treatment to change how self-employment tax applies.
What if I have a loss on Schedule C?
Losses reduce your self-employment income. If your total net self-employment earnings are less than $400, you don’t owe SE tax for that year.
Is self-employment tax the same as Social Security tax?
Self-employment tax includes Social Security tax plus Medicare tax. It’s the self-employed equivalent of FICA taxes that employers withhold from W-2 wages.
Next Steps
Self-employment tax doesn’t have to be an unavoidable hit. The right structure, deductions, and timing decisions can save thousands annually.
If you’re earning $60,000 or more from self-employment, an S-Corp analysis is worth the conversation. Even if S-Corp isn’t the right fit, proper expense tracking and retirement planning reduce what you owe.
Schedule a consultation to see how much you could save with the right tax structure.