Self-employment tax is calculated on your net income, not your gross income. If you freelance, run a sole proprietorship, or take independent contract work, the 15.3% combined Social Security and Medicare rate applies to what’s left after you subtract business expenses from your total receipts.1Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) Every deductible expense reduces the dollar figure you owe.
Why Net Profit Is the Starting Point
Gross income is every dollar your business collected before costs came out. Net profit is what remains after the expenses it took to earn that money. The IRS taxes the net figure because dollars you spent on supplies, software, or workspace aren’t income you kept. A designer who bills $90,000 and spends $25,000 on equipment, software, and marketing has $65,000 in net profit, and self-employment tax applies only to that $65,000.
The logic mirrors ordinary payroll taxes. An employer pays Social Security and Medicare on the wages it hands out, not on company revenue. Self-employed people act as both employer and employee, so the calculation begins with the profit figure that most resembles a wage.
How the Calculation Is Built
Your business income and expenses go on Schedule C (Form 1040), which produces the net profit figure that feeds the self-employment tax calculation.2Internal Revenue Service. About Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship) Line 1 is your gross receipts. From there you subtract ordinary and necessary business expenses, and line 31 gives you net profit or loss. That number carries to Schedule SE.3Internal Revenue Service. About Schedule SE (Form 1040), Self-Employment Tax
Self-employment tax has two components. Social Security is 12.4% and Medicare is 2.9%, for a combined 15.3%.4Office of the Law Revision Counsel. 26 USC 1401 – Rate of Tax In a traditional job you and your employer each cover half. On your own, you pay both halves.
Before the 15.3% rate applies, you reduce your net profit by 7.65%. In practice, you multiply Schedule C net profit by 92.35% to get your taxable self-employment earnings.5Office of the Law Revision Counsel. 26 USC 1402 – Definitions This adjustment exists because W-2 employees don’t pay Social Security and Medicare on the employer’s share of those same taxes, and the reduction puts self-employed workers on roughly equal footing.
A Worked Example
Say you earned $80,000 in gross receipts with $15,000 in deductible expenses.
- Net profit (Schedule C, line 31): $80,000 − $15,000 = $65,000
- Taxable self-employment earnings: $65,000 × 0.9235 = $60,027.50
- Self-employment tax: $60,027.50 × 0.153 = $9,184.21
Of that total, roughly $7,443 covers Social Security and roughly $1,741 covers Medicare. The full amount goes on Schedule SE and carries to your Form 1040.3Internal Revenue Service. About Schedule SE (Form 1040), Self-Employment Tax
Where the Rate Changes
The 12.4% Social Security portion stops at an annual earnings ceiling. For 2026, that ceiling is $184,500.6SSA.gov. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet Once your taxable self-employment earnings pass that number, the 12.4% no longer applies to the excess. The 2.9% Medicare tax has no cap and hits every dollar.4Office of the Law Revision Counsel. 26 USC 1401 – Rate of Tax
If you also collect W-2 wages, those wages count toward the $184,500 cap first. A day job that pays $150,000 leaves only the first $34,500 of your self-employment earnings subject to the 12.4% Social Security tax. The rest still owes the 2.9% Medicare portion.1Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
An extra 0.9% Additional Medicare Tax kicks in once combined earnings cross filing-status thresholds:4Office of the Law Revision Counsel. 26 USC 1401 – Rate of Tax
- Single or head of household: $200,000
- Married filing jointly: $250,000
- Married filing separately: $125,000
If you have both W-2 wages and self-employment income, the IRS adds them together to see whether you’re over the threshold.7Internal Revenue Service. Questions and Answers for the Additional Medicare Tax A single filer with $160,000 in wages and $60,000 in net self-employment earnings would owe the 0.9% surcharge on the $20,000 above $200,000. That’s easy to miss looking at your Schedule C figure alone.
You Deduct Half of What You Pay
You can deduct one-half of your self-employment tax when figuring adjusted gross income.8Office of the Law Revision Counsel. 26 USC 164 – Taxes The deduction sits on Schedule 1 (Form 1040) and lowers the income subject to regular federal income tax.9Internal Revenue Service. Topic No. 554, Self-Employment Tax
In the example above, the $9,184.21 in self-employment tax produces a $4,592.11 deduction. It doesn’t reduce the self-employment tax itself, only the income taxed at your regular rate. For someone in the 22% bracket, that’s roughly $1,010 in income-tax savings. The 0.9% Additional Medicare Tax is not part of this deduction.
The $400 Floor
You owe self-employment tax only if your net earnings reach at least $400 for the year.1Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) The $400 applies to earnings after the 92.35% adjustment, not to gross receipts. A side gig that pulls in $500 with $150 in expenses gives you $350 in net profit, which drops to about $323 after the adjustment and falls under the threshold.
Below $400 in net self-employment earnings, you skip Schedule SE. You may still need to file a federal return based on your total income from wages, investments, and other sources.
Paying It During the Year
W-2 employees have taxes withheld from each paycheck. Self-employed workers pay in quarterly installments. For the 2026 tax year, the deadlines are:10Internal Revenue Service. 2026 Form 1040-ES, Estimated Tax for Individuals
- 1st quarter: April 15, 2026
- 2nd quarter: June 15, 2026
- 3rd quarter: September 15, 2026
- 4th quarter: January 15, 2027
These payments cover both income tax and self-employment tax, so both need to be projected when figuring each installment. Missing or underpaying can trigger an underpayment penalty. The IRS generally waives the penalty if you owe under $1,000 at filing, or if you paid at least 90% of the current year’s tax or 100% of last year’s, whichever is less.11Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty If your prior-year AGI was over $150,000 ($75,000 if married filing separately), the safe harbor based on last year’s tax rises to 110%.12Office of the Law Revision Counsel. 26 USC 6654 – Failure by Individual to Pay Estimated Income Tax Basing quarterly payments on last year’s total tax and truing up at filing is the simplest approach for most people.