To calculate AGI for the self-employed, start with your net business profit from Schedule C, add any other income you received during the year, and then subtract the above-the-line adjustments available to business owners: half of your self-employment tax, self-employed health insurance premiums, retirement plan contributions, and the handful of other adjustments that appear on Schedule 1. The final number lands on Form 1040, line 11, and it drives a long list of credits, deductions, and phase-outs elsewhere on your return.1Internal Revenue Service. Adjusted Gross Income
Start With Net Profit on Schedule C
Your business profit is the foundation of the entire calculation. On Schedule C, you report gross receipts and subtract ordinary and necessary business expenses to arrive at a single net profit or loss figure on line 31.2Internal Revenue Service. Schedule C (Form 1040) – Profit or Loss From Business Farmers use Schedule F, which works the same way.3Internal Revenue Service. About Schedule F (Form 1040), Profit or Loss From Farming
“Ordinary and necessary” is the IRS test. An ordinary expense is common in your line of work; a necessary expense is helpful and appropriate for the business. Rent, utilities, supplies, business mileage, cost of goods sold, advertising, and contractor payments all qualify. The home office deduction counts too if you use part of your home exclusively and regularly for business, with a simplified method allowing $5 per square foot up to 300 square feet ($1,500 cap) or a regular method based on actual expenses.
Equipment purchases get favorable treatment in 2026. The One Big Beautiful Bill Act permanently restored 100% bonus depreciation for qualifying business assets placed in service after January 19, 2025, letting you deduct the full cost in the year of purchase rather than spreading it out. That single move can meaningfully compress Schedule C profit.
Net profit flows from Schedule C to Schedule 1 (Form 1040), line 3, and simultaneously to Schedule SE for the self-employment tax calculation.4Internal Revenue Service. Instructions for Schedule C (Form 1040) A sole proprietor with $150,000 in gross receipts and $40,000 in deductible business expenses reports $110,000 of net self-employment income. That $110,000 is the figure feeding everything that follows.
Subtract Half of Your Self-Employment Tax
Self-employment tax combines Social Security and Medicare into a single 15.3% rate: 12.4% for Social Security and 2.9% for Medicare.5Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) Before applying that rate, you reduce net earnings by 7.65%, so the tax actually runs on 92.35% of Schedule C profit.6Internal Revenue Service. Topic No. 554 – Self-Employment Tax On $110,000, the base is $101,585, producing roughly $15,543 in SE tax.
The 12.4% Social Security piece only applies up to the wage base, which is $184,500 for 2026.7Social Security Administration. Contribution and Benefit Base Earnings above that still owe the 2.9% Medicare portion. If your net self-employment earnings exceed $200,000 ($250,000 for married filing jointly), you also owe an Additional Medicare Tax of 0.9% on the amount over that threshold.8Internal Revenue Service. Questions and Answers for the Additional Medicare Tax
Here is the AGI-side benefit. You deduct exactly half of the calculated SE tax as an adjustment to income on Schedule 1, line 15.9Internal Revenue Service. Schedule 1 (Form 1040) In the example, about $7,772 comes off income before AGI. The deduction reduces your income tax; it does not reduce the SE tax itself.5Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
Apply the Other Above-the-Line Deductions
Above-the-line deductions (formally “adjustments to income”) lower AGI whether you take the standard deduction or itemize. The self-employed have access to several that W-2 workers do not.
Self-Employed Health Insurance
You can deduct 100% of health insurance premiums paid for yourself, your spouse, your dependents, and children under age 27, as long as the insurance is established under your business.10Internal Revenue Service. Instructions for Form 7206 – Self-Employed Health Insurance Deduction The deduction covers medical, dental, vision, and qualified long-term care premiums (with age-based caps on long-term care) and goes on Schedule 1, line 17.
Two limits apply. You cannot take the deduction for any month you were eligible to participate in a subsidized health plan through any employer, including your spouse’s, even if you did not enroll. And the deduction cannot exceed net profit from the business that established the plan, so it cannot create or deepen a loss.
Retirement Plan Contributions
Self-employed retirement plans offer the largest potential AGI reductions available to most business owners. The deduction appears on Schedule 1, line 16. The 2026 limits:
- SEP IRA: the lesser of 25% of net adjusted self-employment earnings or $72,000. No employee elective deferrals are permitted.11Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs)
- Solo 401(k): an elective deferral up to $24,500, plus an employer profit-sharing contribution up to 25% of net adjusted self-employment earnings. Combined cap: $72,000 under 50, $80,000 at 50 or older ($8,000 catch-up), or $83,250 for ages 60 through 63 ($11,250 catch-up).12Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
- SIMPLE IRA: an employee contribution limit of $17,000 for 2026, or $18,100 for certain eligible plans under SECURE 2.0 provisions.
A freelancer with $150,000 in net adjusted self-employment income could defer $24,500 as the employee contribution plus roughly $37,500 as the employer piece in a Solo 401(k), sheltering more than $60,000 from AGI in one year. “Net adjusted self-employment earnings” means Schedule C profit minus half of SE tax, so the retirement calculation and the SE tax calculation feed each other.
Other Common Adjustments
You also get the adjustments available to everyone. Deductible Traditional IRA contributions run up to $7,500 for 2026, or $8,600 at age 50 or older, when you or your spouse are not covered by a workplace plan or when income falls within the phase-out range. Student loan interest is deductible up to $2,500, subject to income phase-outs. HSA contributions reduce AGI if you carry a qualifying high-deductible health plan.
Put the Pieces Together
Once the parts are in place, the arithmetic is clean. Start with net business income from Schedule C. Add other income (a side W-2 job, investments, rentals). That total appears on Form 1040, line 9. Subtract each adjustment on Schedule 1: the deductible half of SE tax, self-employed health insurance, retirement contributions, and any other qualifying item. Schedule 1 totals the adjustments on line 26, which carries to Form 1040, line 10. Line 9 minus line 10 is your AGI, reported on line 11.13Internal Revenue Service. Definition of Adjusted Gross Income
A worked example for a sole proprietor in 2026:
- Schedule C net profit: $110,000
- SE tax base: $110,000 × 0.9235 = $101,585
- Total SE tax: $101,585 × 0.153 = $15,543
- Deductible half of SE tax: $7,772
- Self-employed health insurance premiums: $9,600
- SEP IRA contribution: $110,000 − $7,772 = $102,228 × 0.25 = $25,557
- Total adjustments: $42,929
- AGI: $110,000 − $42,929 = $67,071
That taxpayer converted $110,000 in business income into roughly $67,000 of AGI without touching a dollar of gross receipts. The gap is pure above-the-line adjustment.
Why This Number Matters
AGI gates a long list of tax benefits, so pushing it down with self-employed adjustments does more than save tax on the deducted amount.
Medical expenses are deductible only to the extent they exceed 7.5% of AGI.14Internal Revenue Service. Topic No. 502 – Medical and Dental Expenses At $100,000 AGI, the floor is $7,500; at $67,000, it drops to $5,025. The Child Tax Credit provides up to $2,200 per qualifying child for 2026 and begins phasing out at $200,000 AGI for single filers and $400,000 for joint filers.15Internal Revenue Service. Child Tax Credit The Earned Income Tax Credit and education credits like the American Opportunity Credit and Lifetime Learning Credit all turn on AGI.
AGI also controls Roth IRA access. For 2026, Roth contribution ability phases out between $153,000 and $168,000 AGI for single filers and between $242,000 and $252,000 for joint filers. If you or your spouse participates in a workplace retirement plan (including your own Solo 401(k) or SEP), Traditional IRA deductibility phases out between $81,000 and $91,000 single and $129,000 and $149,000 joint. Lowering AGI through self-employed adjustments can pull you back into fully deductible or fully eligible territory.
One boundary worth flagging: the Section 199A Qualified Business Income deduction is a below-the-line deduction, so it reduces taxable income but not AGI.16Internal Revenue Service. Qualified Business Income Deduction It sits in a different place on the return from everything described above. The AGI calculation finishes before QBI enters the picture.
Build the Number Before You Pay Estimated Taxes
The same calculation drives your quarterly estimated payments. If you expect to owe $1,000 or more at filing, the IRS generally requires quarterly estimates covering both income tax and SE tax.17Internal Revenue Service. Estimated Taxes Form 1040-ES uses projected net business income, projected SE tax, and projected above-the-line deductions to size each payment. In other words, you run the AGI calculation on estimated numbers four times a year before you ever run it on final numbers in April.