“What’s my tax rate?” seems like a simple question. For sole proprietors, the answer is never simple.
You don’t have one tax rate. You have at least two: your marginal income tax rate AND self-employment tax. Add those together and you’re looking at combined rates of 25% to 50% depending on your income level. That surprises a lot of first-time business owners who expected the same tax burden as their W-2 days.
Understanding how sole proprietors are taxed helps you plan better, pay less, and avoid the quarterly estimated payment panic that hits so many freelancers and contractors.
What is the sole proprietor tax rate for 2026?
Sole proprietors pay both federal income tax (10% to 37% based on tax brackets) AND self-employment tax (15.3% on 92.35% of net earnings). At $100,000 net profit, a single filer with no other income would pay approximately $14,130 in self-employment tax plus about $11,500 in federal income tax, for a combined effective rate of roughly 26%. Most sole proprietors also qualify for the 20% Qualified Business Income (QBI) deduction, which reduces taxable income and lowers the overall burden.
Key Takeaways
- Two separate taxes apply – Federal income tax (marginal rates 10-37%) plus self-employment tax (15.3%), calculated separately
- Self-employment tax is flat-ish – 15.3% on 92.35% of net earnings (effectively 14.13%), with Social Security portion capping at $184,500 for 2026
- Income tax uses brackets – You don’t pay 22% on everything. You pay 10% on the first portion, 12% on the next, then 22%, etc.
- QBI deduction reduces taxable income – Most sole proprietors can deduct 20% of qualified business income, lowering federal income tax
- Standard deduction: $16,100 single, $32,200 MFJ – This reduces taxable income before brackets apply
- Estimated payments are quarterly – April 15, June 15, September 15, January 15 to avoid penalties
Table of Contents
2026 Federal Income Tax Brackets
The IRS released 2026 tax brackets with inflation adjustments. Here’s what you’ll pay based on taxable income:
Single Filers
| Taxable Income | Tax Rate | Tax Owed |
|---|---|---|
| $0 – $12,400 | 10% | 10% of income |
| $12,401 – $50,400 | 12% | $1,240 + 12% of amount over $12,400 |
| $50,401 – $105,700 | 22% | $5,800 + 22% of amount over $50,400 |
| $105,701 – $197,700 | 24% | $17,966 + 24% of amount over $105,700 |
| $197,701 – $250,350 | 32% | $40,046 + 32% of amount over $197,700 |
| $250,351 – $640,600 | 35% | $56,894 + 35% of amount over $250,350 |
| Over $640,600 | 37% | $193,481 + 37% of amount over $640,600 |
Married Filing Jointly
| Taxable Income | Tax Rate | Tax Owed |
|---|---|---|
| $0 – $24,800 | 10% | 10% of income |
| $24,801 – $100,800 | 12% | $2,480 + 12% of amount over $24,800 |
| $100,801 – $211,400 | 22% | $11,600 + 22% of amount over $100,800 |
| $211,401 – $395,400 | 24% | $35,932 + 24% of amount over $211,400 |
| $395,401 – $500,700 | 32% | $80,092 + 32% of amount over $395,400 |
| $500,701 – $768,600 | 35% | $113,788 + 35% of amount over $500,700 |
| Over $768,600 | 37% | $207,553 + 37% of amount over $768,600 |
Key point: These brackets apply to TAXABLE income (after standard deduction and other adjustments), not gross business income.
2026 Self-Employment Tax Rate
Self-employment tax is separate from income tax. It’s the Social Security and Medicare contribution for self-employed individuals.
| Component | Rate | 2026 Cap |
|---|---|---|
| Social Security | 12.4% | $184,500 |
| Medicare | 2.9% | No cap |
| Additional Medicare | 0.9% | Above $200K (single) |
| Total | 15.3% | (varies) |
The 15.3% rate applies to 92.35% of net self-employment earnings, making the effective rate about 14.13%.
Example: $100,000 net SE income
- Taxable SE earnings: $100,000 × 92.35% = $92,350
- SE tax: $92,350 × 15.3% = $14,130
You can deduct half of self-employment tax ($7,065 in this example) as an adjustment to income on your Form 1040.
How Sole Proprietors Are Actually Taxed: Example
Let’s calculate the full tax burden for a sole proprietor with $100,000 net business profit, single, no other income.
Step 1: Calculate Self-Employment Tax
- Net SE income: $100,000
- SE tax: $100,000 × 0.9235 × 0.153 = $14,130
Step 2: Calculate Adjustments to Income
- SE tax deduction (50% of SE tax): $7,065
- Total adjustments: $7,065
Step 3: Calculate Adjusted Gross Income (AGI)
- Gross income: $100,000
- Minus adjustments: $7,065
- AGI: $92,935
Step 4: Apply QBI Deduction (Qualified Business Income)
Most sole proprietors qualify for a 20% deduction on qualified business income.
- QBI deduction: $100,000 × 20% = $20,000
- (Subject to limitations based on income and business type)
Step 5: Calculate Taxable Income
- AGI: $92,935
- Minus standard deduction: $16,100
- Minus QBI deduction: $20,000
- Taxable income: $56,835
Step 6: Calculate Federal Income Tax
Using 2026 single filer brackets:
- 10% on first $12,400: $1,240
- 12% on $12,401-$50,400: $4,560
- 22% on $50,401-$56,835: $1,416
Federal income tax: $7,216
Step 7: Calculate Total Tax Burden
| Tax | Amount |
|---|---|
| Self-employment tax | $14,130 |
| Federal income tax | $7,216 |
| Total | $21,346 |
Effective rate on $100,000: 21.3%
Without QBI Deduction
If QBI didn’t apply, taxable income would be $76,835, and federal income tax would be about $11,600. Total tax: $25,730 (25.7% effective).
The QBI deduction saves this sole proprietor approximately $4,400.
Combined Effective Tax Rates by Income Level
Here’s what sole proprietors (single filers) actually pay at different income levels, including both SE tax and income tax:
| Net Profit | SE Tax | Income Tax | Total Tax | Effective Rate |
|---|---|---|---|---|
| $50,000 | $7,065 | $1,876 | $8,941 | 17.9% |
| $75,000 | $10,597 | $4,462 | $15,059 | 20.1% |
| $100,000 | $14,130 | $7,216 | $21,346 | 21.3% |
| $150,000 | $20,078 | $15,268 | $35,346 | 23.6% |
| $200,000 | $25,170 | $24,488 | $49,658 | 24.8% |
Notes:
- Assumes single filer, no other income, standard deduction, full QBI deduction
- SE tax calculation includes Social Security cap effect above $184,500
- Actual rates vary based on filing status, other income, and QBI limitations
Marginal vs. Effective Tax Rates
Understanding the difference prevents overpaying estimated taxes and guides business decisions.
Marginal rate: The rate on your next dollar of income. If you’re in the 22% bracket, an additional $1,000 of income triggers $220 in federal income tax (plus SE tax).
Effective rate: Your total tax divided by total income. Always lower than marginal because lower portions of income are taxed at lower rates.
Why it matters:
When deciding whether to take a deduction or make a business purchase, use your marginal rate. A $1,000 deduction saves you 22% + 14.13% = 36.13% if you’re in the 22% bracket.
When calculating estimated payments or overall tax burden, focus on effective rate.
The Qualified Business Income (QBI) Deduction
The QBI deduction allows most sole proprietors to deduct 20% of qualified business income from taxable income.
Basic calculation: Qualified Business Income × 20% = QBI Deduction
Limitations apply if:
- Taxable income exceeds $197,300 (single) or $394,600 (MFJ)
- Your business is a Specified Service Trade or Business (SSTB) – includes health, law, accounting, consulting, financial services, athletics, performing arts
For high-income non-SSTBs: The deduction is limited to the greater of:
- 50% of W-2 wages paid by the business, OR
- 25% of W-2 wages plus 2.5% of qualified property
For SSTBs above threshold: The deduction phases out and becomes zero above $247,300 (single) or $494,600 (MFJ).
Most sole proprietors under the threshold simply deduct 20% without limitations.
Estimated Tax Payments
Sole proprietors don’t have taxes withheld from their income. Instead, you make quarterly estimated payments.
2026 Estimated Tax Due Dates
| Payment | Due Date | For Income Earned |
|---|---|---|
| Q1 | April 15, 2026 | January – March |
| Q2 | June 16, 2026 | April – May |
| Q3 | September 15, 2026 | June – August |
| Q4 | January 15, 2027 | September – December |
Safe Harbor Rules
To avoid underpayment penalties, pay at least:
- 90% of current year tax liability, OR
- 100% of prior year tax (110% if AGI exceeded $150,000)
Most sole proprietors use the prior year method in their first few years, then switch to current-year estimates as income stabilizes.
How to Calculate Estimated Payments
- Estimate annual net profit
- Calculate SE tax (×0.9235 × 0.153)
- Calculate taxable income (profit – SE deduction – standard deduction – QBI)
- Apply tax brackets to get income tax
- Add SE tax + income tax
- Divide by 4 for quarterly payments
Use our quarterly tax planning checklist to stay on track.
Reducing Your Tax Rate as a Sole Proprietor
1. Maximize Business Deductions
Every dollar of deduction reduces both income tax AND self-employment tax. At a 22% bracket plus 14.13% SE tax, each dollar saves 36+ cents.
See our complete list of Schedule C deductions.
2. Contribute to Retirement Plans
SEP-IRA, Solo 401(k), or SIMPLE IRA contributions reduce taxable income AND self-employment income.
- SEP-IRA: Up to 25% of net SE income (max $70,000)
- Solo 401(k): $23,500 employee + 25% employer match (max $70,000)
3. Consider S-Corp Election
If net profit exceeds $60,000-$80,000, S-Corp election can significantly reduce self-employment tax.
S-Corp lets you split income between salary (subject to payroll tax) and distributions (not subject to SE/payroll tax).
4. Hire Family Members
Legitimate wages to a spouse or children are deductible. If your child is under 18 and works in your sole proprietorship, their wages are exempt from Social Security and Medicare taxes.
5. Time Income and Expenses
If income varies significantly year to year, timing strategies can keep you in lower brackets. Accelerate deductions into high-income years and defer income when possible into lower-income years.
Frequently Asked Questions
Do sole proprietors pay higher taxes than employees?
Sole proprietors pay the full 15.3% self-employment tax, while employees split FICA 50/50 with their employer. However, the QBI deduction and greater control over deductions often offset this difference.
What’s the tax on $75,000 sole proprietor income?
For a single filer with $75,000 net profit, no other income:
- SE tax: ~$10,597
- Federal income tax: ~$4,462
- Total: ~$15,059 (about 20.1% effective rate)
Do I pay taxes on gross or net income?
Net income. Your gross receipts minus business expenses equals net profit, which is what you’re taxed on.
Can I reduce self-employment tax?
Yes. Business deductions reduce SE income. Retirement contributions reduce SE income. S-Corp election splits income to reduce SE tax on distributions.
What if I also have a W-2 job?
Your W-2 income affects your tax bracket for the business income. Also, if W-2 wages hit the Social Security cap ($184,500), you won’t owe the Social Security portion of SE tax on self-employment income.
Next Steps
Sole proprietor tax rates combine income tax and self-employment tax in ways that surprise many business owners. Knowing your combined marginal rate helps you make smarter decisions about deductions, purchases, and business structure.
If you’re consistently earning $60,000 or more, an analysis of whether S-Corp structure would reduce your overall tax burden is worth the conversation.
Schedule a consultation to understand your specific tax situation and identify opportunities to reduce what you owe.