Self-employment income is the net profit you earn from running your own business or working for yourself as an independent contractor, partner, or gig worker, calculated by subtracting business expenses from what your business took in. Once that net figure hits $400 in a year, you owe self-employment tax of 15.3% on 92.35% of the profit, covering Social Security and Medicare, plus regular income tax on the same money.1Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) Employees split payroll taxes with their employer. You pay both halves.
What Counts as Self-Employment Income
You have self-employment income if you carry on a trade or business as a sole proprietor, an independent contractor, or a member of a partnership.2Internal Revenue Service. Sole Proprietorships Full-time and part-time both count. Freelance writing, consulting, contract software work, sales commissions paid to independent agents, revenue from products you sell through your own store, and gig economy work like rideshare driving and delivery all fall under the definition.3Taxpayer Advocate Service. An Introduction to Tax Forms for Gig Economy Workers
Side projects catch people out. A weekend photography business, tutoring on the side, or reselling vintage clothing online counts as self-employment income if you’re doing it to make money rather than as a hobby. The IRS looks at whether you keep records, put time into improving profitability, and treat the activity like a business.4Internal Revenue Service. Here’s How to Tell the Difference Between a Hobby and a Business for Tax Purposes Hobby losses can’t offset other income, so the classification matters.
The dividing line between an independent contractor and an employee turns on the actual working arrangement, not the label on a contract. If the payer controls only the result of your work and not the methods, you’re likely a contractor.5Internal Revenue Service. Employee (Common-Law Employee) Practically, that means you receive a Form 1099 rather than a W-2, no tax is withheld, and every dollar of tax planning is on you.6Internal Revenue Service. When Would I Provide a Form W-2 and a Form 1099 to the Same Person?
The $400 Threshold
Self-employment tax kicks in once your net earnings from self-employment reach $400 in the year.1Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) Net, not gross. If you earned $5,000 freelancing and had $4,700 in legitimate business expenses, your $300 net profit falls below the line and no SE tax is due. The threshold governs SE tax only; you may still need to file a federal income tax return based on your total income from all sources.
How the Tax Is Calculated
The math runs in three steps: figure your net profit, apply the 92.35% multiplier, then apply the 15.3% rate.
Start With Net Profit
On Schedule C, you report gross receipts and subtract ordinary and necessary business expenses to arrive at net profit.7Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses That includes cost of goods sold, rent, utilities, supplies, software, advertising, business insurance, travel and vehicle costs (72.5 cents per mile for 2026), and depreciation on equipment used in the business.8Internal Revenue Service. Publication 946 (2024), How To Depreciate Property Partners add their share of partnership income or loss from Schedule K-1.9eCFR. 26 CFR 1.1402(a)-1 – Definition of Net Earnings from Self-Employment
Multiply by 92.35%
Schedule SE doesn’t tax your full net profit. You multiply it by 0.9235 first.10Internal Revenue Service. Topic No. 554, Self-Employment Tax The adjustment approximates the discount employees get when their employer’s half of payroll tax reduces the wage base, putting you on roughly equal footing.
Apply the 15.3% Rate
The rate breaks down as 12.4% for Social Security and 2.9% for Medicare.1Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) On $80,000 of net profit, you’d multiply by 0.9235 to get $73,880, then apply 15.3% for roughly $11,304 in SE tax. That’s before any regular income tax on the same earnings.11Internal Revenue Service. Schedule SE (Form 1040) 2025
The Social Security Cap and Extra Medicare Tax
The 12.4% Social Security portion only applies to earnings up to the annual wage base, $184,500 for 2026.12Social Security Administration. Contribution and Benefit Base If you also earn W-2 wages, your wages and self-employment income are combined against that ceiling. The 2.9% Medicare portion has no cap.
An additional 0.9% Medicare tax applies once your combined self-employment income and wages pass $200,000 for a single filer or $250,000 for joint filers, bringing the effective Medicare rate on income above those thresholds to 3.8%.1Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
Deductions That Cut Your Bill
Several deductions are available specifically to self-employed workers, and they reduce adjusted gross income rather than just taxable income.
Half of Your SE Tax
You deduct 50% of your self-employment tax when calculating adjusted gross income.10Internal Revenue Service. Topic No. 554, Self-Employment Tax On $11,304 of SE tax, that’s about $5,652 shaved off income before income tax is calculated. The deduction lowers income tax but not the SE tax itself.
Health Insurance Premiums
If you pay for your own health, dental, or vision coverage and aren’t eligible for a spouse’s employer plan, you can deduct 100% of the premiums as an adjustment to income, up to your net self-employment profit. Coverage for your spouse, dependents, and children under 27 qualifies, and voluntary Medicare premiums can be included.13Internal Revenue Service. 2025 Instructions for Form 7206 Self-Employed Health Insurance Deduction
Retirement Contributions
A SEP IRA allows contributions of up to 25% of net self-employment earnings (after the deduction for half of SE tax), capped at $72,000 for 2026.14Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs) A Solo 401(k) permits up to $24,500 as an employee deferral plus a profit-sharing contribution, with total additions capped at $72,000, or $80,000 if you’re 50 or older, and $83,250 between ages 60 and 63.15Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
Qualified Business Income Deduction
The Section 199A deduction lets eligible self-employed individuals deduct up to 20% of qualified business income from taxable income. It was made permanent in 2025 and remains available for 2026. The deduction phases out for single filers with taxable income above roughly $202,000 and joint filers above roughly $404,000, with additional restrictions above those levels for service businesses like law, medicine, and consulting.
Quarterly Estimated Payments
With no employer withholding, you pay as you earn through quarterly estimated payments that cover both SE tax and income tax.16Internal Revenue Service. Self-Employed Individuals Tax Center The 2026 deadlines are April 15, June 15, September 15, and January 15, 2027. You can skip the January payment by filing your 2026 return and paying the full balance by February 1, 2027.17Internal Revenue Service. 2026 Form 1040-ES – Estimated Tax for Individuals
Miss a deadline and the IRS charges interest on the shortfall at the federal short-term rate plus three percentage points, which sat at 7% as of early 2026.18Internal Revenue Service. Interest Rates Remain the Same for the First Quarter of 2026 You can avoid the underpayment penalty by paying at least 90% of the current year’s tax or 100% of last year’s (110% if your AGI exceeded $150,000).19Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty When income is unpredictable, basing payments on the prior year’s liability is usually the simplest safe harbor.
Failing to file is worse than failing to pay. The failure-to-file penalty is 5% of unpaid tax per month, up to 25%, and a separate 0.5% monthly failure-to-pay penalty stacks on top.20Internal Revenue Service. Failure to File Penalty If you can’t pay in full, file on time anyway and arrange a payment plan.
Income That Isn’t Self-Employment Income
Not every dollar you make runs through Schedule SE. W-2 wages are excluded because payroll taxes were already withheld.21Internal Revenue Service. About Form W-2, Wage and Tax Statement Interest, dividends, and capital gains from personal investments aren’t self-employment income unless you’re a licensed securities dealer trading as a business.10Internal Revenue Service. Topic No. 554, Self-Employment Tax Rental income from real estate is generally excluded too, with one exception: if you’re a real estate professional providing substantial services to tenants, such as short-term rental operations you actively run, that income can be subject to SE tax. Legal settlements, gifts, and inheritances also fall outside the definition.
How the Income Gets Reported to You
A client or platform that pays you $600 or more in a year must send you Form 1099-NEC, which replaced the old 1099-MISC for nonemployee compensation.22Internal Revenue Service. Am I Required to File a Form 1099 or Other Information Return? You should receive it by the end of January.
Payments processed through third-party platforms like payment apps, online marketplaces, and rideshare companies come with a separate form, the 1099-K. For 2026, platforms send a 1099-K when your gross payments exceed $20,000 and you had more than 200 transactions in the year. Credit and debit card payments have no minimum threshold and can trigger a 1099-K at any amount.23Internal Revenue Service. IRS Revises and Updates Form 1099-K Frequently Asked Questions
One thing to keep in mind: you owe tax on all self-employment income whether or not a 1099 arrives. A $500 payment from a client who never issued a form still belongs on your Schedule C. Keep your own records of every payment received, because the absence of a 1099 doesn’t excuse the income.