How Self-Employment Tax Works, Step by Step (2026)

Self-employment tax explained step by step by Robert Allen Bautista, Kansas City tax preparer

If you freelance, drive for an app, or run a one-person business, the tax that surprises people most is not income tax. It is self-employment tax, the Social Security and Medicare tax that an employer would normally split with you. When you work for yourself, you pay both halves. Here is exactly how it is calculated, step by step.

Step 1: Figure your net profit

Self-employment tax is based on net earnings, not gross revenue. Start with what you were paid, then subtract ordinary and necessary business expenses on Schedule C (or your share of partnership income on Schedule K-1). Every legitimate expense you record lowers both income tax and self-employment tax.

Step 2: Multiply by 92.35%

You do not pay the tax on 100% of profit. The IRS lets you multiply net profit by 92.35% first. This mirrors the fact that employees do not pay Social Security and Medicare on the employer's share. If net earnings after this step are under $400, you generally owe no self-employment tax.

Step 3: Apply the 15.3% rate

  • 12.4% Social Security, but only up to the annual wage base. For 2026 that limit is $184,500, and it counts W-2 wages first.
  • 2.9% Medicare on all net earnings, with no cap.
  • An extra 0.9% Additional Medicare Tax applies above $200,000 (single) or $250,000 (married filing jointly).

Step 4: Deduct half of it

You can deduct half of your self-employment tax as an adjustment to income on your Form 1040. That lowers your income tax (not the self-employment tax itself), the same way an employer deducts its share of payroll taxes.

A quick example

A freelance designer has $60,000 of net profit. $60,000 × 92.35% = $55,410. $55,410 × 15.3% = about $8,478 of self-employment tax, reported on Schedule SE. About $4,239 of that is deductible when figuring income tax. Income tax is owed on top of this, which is why setting aside 25 to 30 percent of profit is a common rule of thumb.

Step 5: Pay during the year, not just in April

Because no employer is withholding for you, the IRS expects quarterly estimated payments using Form 1040-ES, generally due April 15, June 15, September 15 and January 15. Paying at least 100% of last year's total tax (110% if your income was over $150,000), or 90% of this year's, usually avoids the underpayment penalty.

Ways to legitimately lower it

  • Track every business expense, including mileage and a qualifying home office
  • Contribute to a SEP IRA or Solo 401(k) (lowers income tax; plan carefully)
  • Once profit is high and steady, compare an S corporation election; see my two-part series, LLC vs. S Corp and Part 2: Running the Numbers

Official IRS sources

This article is general information, not tax advice for your specific situation.

Related guides

About the author

Robert Allen Bautista is a tax preparer and accountant in Kansas City. He spent four years at PwC in IT audit and tax, served as Chief Accountant at a CPA firm, holds an M.S. in Accounting, and is a CPA candidate. He has worked with 350-plus individual and small business clients and writes plain-English tax guides in English and Spanish. More about Robert · Website · LinkedIn 

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