Net earnings from self-employment are your business profit — gross income minus allowable business expenses — multiplied by 92.35 percent. That adjusted figure, not your full profit, is what the IRS uses to calculate the self-employment tax that funds your Social Security and Medicare. You owe self-employment tax once your net earnings reach $400 for the year, and the combined rate is 15.3 percent on earnings up to $184,500 for 2026, with Medicare tax continuing on every dollar above that cap.1Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
What Income Goes Into the Calculation
You have self-employment income if you run a trade or business as a sole proprietor, work as an independent contractor, or receive a distributive share of income from a partnership that operates a business.2Internal Revenue Service. Self-Employed Individuals Tax Center Part-time work and side gigs count as long as you perform the activity regularly with the goal of making a profit.3Internal Revenue Service. Worker Classification 101: Employee or Independent Contractor
Your gross income includes everything you receive for your services: cash, checks, card payments, and the fair market value of any property or services you accept in trade. If a client pays you with equipment worth $2,000 instead of cash, that $2,000 is still reportable income. For 2026, clients who pay you $2,000 or more during the year must report those payments on Form 1099-NEC, but you owe tax on all your earnings whether or not a 1099 is issued.4Internal Revenue Service. Form 1099-NEC and Independent Contractors
Some income that self-employed people often receive stays out of the net earnings calculation. Rental income from real estate is generally excluded unless you’re a real-estate dealer. Interest, dividends, capital gains on investments, and gains on the sale of business property fall outside the base as well. Notary public fees also have a specific exclusion.5Internal Revenue Service. Instructions for Schedule SE (Form 1040) These items may still be subject to regular income tax, but they won’t add to your self-employment tax.
Business Expenses That Reduce Your Profit
Every deductible business expense lowers the profit figure you start with, which lowers your net earnings and your self-employment tax. Federal tax law lets you deduct expenses that are ordinary (common in your line of work) and necessary (helpful and appropriate for your business).6Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses An expense doesn’t have to be essential — it just needs to make sense for what you do.
Common deductions include supplies, business insurance, advertising, professional fees paid to accountants or attorneys for business work, and rent for office space. Business travel expenses such as airfare, lodging, and non-entertainment meals also reduce your net profit.7Internal Revenue Service. Publication 463 (2025), Travel, Gift, and Car Expenses
Vehicle Use
If you drive for business, you can deduct either your actual vehicle expenses (gas, insurance, repairs, depreciation) or the standard mileage rate. For 2026, the standard mileage rate for business driving is 72.5 cents per mile.8Internal Revenue Service. 2026 Standard Mileage Rates Either method requires a log showing the date, destination, business purpose, and miles for each trip.9Internal Revenue Service. Publication 463 (2025), Travel, Gift, and Car Expenses – Section: Recordkeeping
Home Office
If you use part of your home regularly and exclusively for business, you can deduct a portion of your housing costs. The simplified method gives you $5 per square foot, capped at 300 square feet ($1,500).10Internal Revenue Service. Simplified Option for Home Office Deduction The regular method applies the business-use percentage of your home to your actual housing costs and sometimes produces a bigger deduction, but it takes more recordkeeping.
Health Insurance
Self-employed individuals can deduct 100 percent of health insurance premiums paid for themselves, a spouse, and dependents, including children under age 27. The plan must be established under your business, though a policy in your own name satisfies that requirement for sole proprietors.11Internal Revenue Service. 2025 Instructions for Form 7206 – Self-Employed Health Insurance Deduction Note the boundary: this deduction is claimed on Schedule 1 as an adjustment to income, so it lowers your income tax but does not lower your self-employment tax. You also lose the deduction for any month you were eligible to join an employer-sponsored plan through a spouse or another source.
Keep receipts, bank statements, and logs for everything you deduct. If the IRS disallows an expense you can’t support, your net earnings and your tax both go up.
Why the 92.35 Percent Multiplier
Once you subtract your business expenses from gross income, you don’t pay self-employment tax on the full net profit. You multiply that profit by 92.35 percent (0.9235), and the result is your net earnings from self-employment. That is the number that drives the tax calculation.
The reason for the reduction is parity with employees. Employees split payroll taxes with their employer, and the employer’s half never appears in the employee’s taxable wages. Self-employed people pay both halves, so the tax code lets you exclude the equivalent of the employer’s share — 7.65 percent — before applying the tax. Half of 15.3 percent is 7.65 percent, which leaves 92.35 percent as the taxable slice. The statute writes this in as a reduction of net earnings equal to one-half of the combined Social Security and Medicare rates.12GovInfo. 26 USC 1402 – Definitions
A quick example. If your Schedule C shows $80,000 in net profit, your net earnings from self-employment are $80,000 × 0.9235 = $73,880. Self-employment tax is calculated on that $73,880, not on the $80,000.
What the Number Means for Your 2026 Tax
The self-employment tax rate is 15.3 percent, made up of 12.4 percent for Social Security and 2.9 percent for Medicare.1Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) The two pieces have different caps, and the split matters at higher incomes.
- Social Security, 12.4 percent, applies only to the first $184,500 of combined wages and net self-employment earnings in 2026. If you also have W-2 wages, those count toward the cap first, so your self-employment earnings may be partially or entirely above the ceiling.13SSA. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet
- Medicare, 2.9 percent, has no income cap. Every dollar of net self-employment earnings is subject to it.
- An additional 0.9 percent Medicare tax kicks in when your total self-employment income combined with any wages exceeds $200,000 (single) or $250,000 (married filing jointly). These thresholds are set by statute and don’t adjust for inflation.1Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
Continuing the earlier example, $73,880 sits below the Social Security wage base, so the full 15.3 percent applies: $73,880 × 0.153 = $11,304 in self-employment tax.
The Half-of-SE-Tax Deduction
After you calculate self-employment tax, you deduct half of it when figuring your adjusted gross income. This appears on Schedule 1 of Form 1040 and reduces your income tax, though it does not reduce the self-employment tax itself.14Internal Revenue Service. Topic No. 554, Self-Employment Tax In the example, you’d subtract $5,652 (half of $11,304) from your gross income before applying your income tax bracket. It’s the same benefit employees get when their employer’s share of payroll taxes stays out of their taxable wages.
Reporting and Paying
You report the underlying numbers through a chain of forms. Schedule C lists your gross income and business expenses to arrive at net profit or loss.15IRS.gov. 2025 Instructions for Schedule C (Form 1040) – Profit or Loss From Business That net profit flows to Schedule SE, where the 92.35 percent adjustment happens and the self-employment tax is figured. Both schedules are filed with your Form 1040.16Internal Revenue Service. Instructions for Schedule SE (Form 1040) (2025)
Because no employer is withholding tax from your payments, you’re expected to pay as you earn. If you expect to owe $1,000 or more in combined income and self-employment tax for the year (after any withholding and credits), you need to make quarterly estimated payments.17Internal Revenue Service. How Do I Know If I Have to Make Quarterly Individual Estimated Tax Payments? For 2026, the deadlines are April 15, 2026; June 15, 2026; September 15, 2026; and January 15, 2027.18Internal Revenue Service. 2026 Form 1040-ES
You avoid the underpayment penalty by paying at least 90 percent of your current-year tax liability through estimated payments, or 100 percent of last year’s liability, whichever is smaller. If last year’s adjusted gross income was over $150,000 ($75,000 if married filing separately), that 100 percent figure rises to 110 percent.19Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty
Why the Number Matters Even If You Owe No Tax
When the IRS processes your return, your net earnings from self-employment are reported to the Social Security Administration and credited to your earnings record.20Social Security Administration. If You Are Self-Employed That record determines your eligibility for retirement and disability benefits and the size of your future monthly payments. Underreporting your income now shrinks the benefits you’ll collect later. Even if you owe no income tax for the year, you still need to file Form 1040 with Schedule SE once your net earnings hit $400, so those earnings get counted toward your Social Security record.1Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)