Self-employment tax is the Social Security and Medicare tax that self-employed individuals pay on their net business income, equivalent to both the employer and employee portions of FICA taxes that W-2 workers share with their employers. For 2026, the combined self-employment tax rate is 15.3% on the first $168,600 of net earnings (12.4% for Social Security plus 2.9% for Medicare), with an additional 0.9% Medicare surtax on earnings above $200,000 for single filers. Unlike W-2 employees who pay only 7.65%, freelancers, independent contractors, gig workers, and sole proprietors bear the full 15.3% burden — though the IRS allows a deduction for the employer-equivalent half. Our self-employment tax calculator computes your exact liability based on net business income, filing status, and other income, showing the Social Security portion, Medicare portion, any additional Medicare tax, the deductible half, and your effective self-employment tax rate after the deduction.
How self-employment tax is calculated step by step
The IRS calculates self-employment tax on 92.35% of net earnings (not the full amount), reflecting the employer-equivalent deduction built into the calculation. If your Schedule C shows $100,000 net profit, the taxable base is $92,350. Social Security tax: $92,350 × 12.4% = $11,451.40 (capped at $168,600 base). Medicare tax: $92,350 × 2.9% = $2,678.15 (no cap). Total SE tax: $14,129.55. You then deduct half ($7,064.78) from gross income on your 1040, reducing both income tax and AGI. This deduction means the effective SE tax rate is approximately 14.13% rather than the stated 15.3%. For high earners above $200,000 ($250,000 married filing jointly), the additional 0.9% Medicare surtax applies to earnings above the threshold.
Estimated quarterly payments and avoiding penalties
Self-employed individuals must make quarterly estimated tax payments (Form 1040-ES) by April 15, June 15, September 15, and January 15. The IRS imposes underpayment penalties if you owe more than $1,000 at filing time and haven't paid either 90% of current year tax or 100% of prior year tax (110% if AGI exceeds $150,000). A common strategy is the safe harbor method — pay 100/110% of last year's total tax liability divided into four equal payments, regardless of current year income fluctuations. Many freelancers set aside 25-30% of every payment received in a separate bank account for taxes: roughly 15.3% for SE tax plus 10-15% for federal income tax, depending on bracket.
Strategies to reduce self-employment tax
The most effective strategy is electing S-corporation status once net income exceeds approximately $40,000-50,000. As an S-corp owner, you pay yourself a reasonable salary (subject to FICA) and take remaining profits as distributions (not subject to SE tax). On $100,000 net income with a $60,000 salary, you save SE tax on $40,000 — approximately $5,652 annually. However, S-corp status adds compliance costs ($1,000-3,000 per year for payroll and tax preparation), so the breakeven point matters. Other strategies include maximizing business deductions (home office, health insurance premiums, retirement contributions), contributing to a SEP-IRA (up to 25% of net self-employment income, maximum $69,000 in 2026), and properly classifying workers to avoid unnecessary SE tax on payments to subcontractors.