Quick overview

Self-employment tax covers the Social Security and Medicare portion of payroll taxes for people who work for themselves. Unlike employees, who split payroll taxes with an employer, self-employed workers pay both the employee and employer shares. Accurate calculation and timely payments (including quarterly estimated taxes when required) prevent penalties and protect future Social Security and Medicare credits (IRS: Self-Employment Tax).

Step-by-step: How to calculate self-employment tax

Follow these steps to compute the tax you owe on self-employment income.

  1. Calculate business net profit or loss
  • Use Schedule C (or the appropriate business tax form) to report gross receipts and subtract ordinary and necessary business expenses. The resulting figure is your net profit or loss. If you operate a partnership or S corporation, use the income reported to you on the applicable K-1.
  1. Determine net earnings from self-employment

  • Multiply your net profit by 92.35% (0.9235). This adjustment reflects the allowable deduction for the employer-equivalent portion of self-employment tax and is the amount reported on Schedule SE that is subject to SE tax (IRS Publication and Schedule SE instructions).

    Example: Net profit = $50,000

  • Net earnings subject to SE tax = $50,000 × 0.9235 = $46,175

  1. Apply Social Security and Medicare rates

  • Social Security: 12.4% on net earnings up to the annual Social Security wage base (the wage base is adjusted yearly).

  • Medicare: 2.9% on all net earnings (no cap), plus an additional 0.9% Additional Medicare Tax on the portion of income over the filing-status thresholds (for 2025 thresholds check IRS guidance). For most filers, the combined rate is 15.3% (12.4% + 2.9%) on earnings under the Social Security cap; on income above the cap, only Medicare applies (2.9% plus the potential 0.9% surtax).

    Using the earlier example (assuming earnings are below the Social Security wage base):

  • Social Security tax = $46,175 × 12.4% = $5,728. (If your net earnings exceed the annual cap, only the portion up to the cap is taxed at 12.4%.)

  • Medicare tax = $46,175 × 2.9% = $1,339

  • Total self-employment tax = $5,728 + $1,339 = $7,067

  1. Calculate the deductible portion

  • You may deduct one-half of your self-employment tax as an adjustment to income on Form 1040. This deduction reduces your adjusted gross income (AGI) but is not a business expense on Schedule C.

  • Example (half deduction) = $7,067 × 50% = $3,533.50 deductible on Form 1040.

  1. Report the tax
  • Report self-employment tax on Schedule SE and include it with your Form 1040 return. If you expect to owe $1,000 or more in tax after withholding and credits, make quarterly estimated payments using Form 1040-ES (IRS: Estimated Taxes).

Practical example with quarterly planning

A freelance web developer expects $80,000 in gross receipts and $25,000 in deductible business expenses for the year.

  • Net profit = $80,000 − $25,000 = $55,000
  • Net earnings subject to SE tax = $55,000 × 0.9235 = $50,792.50
  • Social Security portion (if under the wage base) = $50,792.50 × 12.4% = $6,300. (Cap may reduce this if your combined earnings exceed the wage base.)
  • Medicare portion = $50,792.50 × 2.9% = $1,473
  • Total SE tax = $7,773
  • Half of SE tax deductible on Form 1040 = $3,886.50

If no withholding occurs, divide expected total tax liability (income tax + SE tax − credits/withholding) into quarterly estimated payments due roughly April, June, September, and January to avoid underpayment penalties.

Reporting and filing: which forms to use

  • Schedule C (Form 1040): reports business income and expenses for sole proprietors.
  • Schedule SE (Form 1040): computes self-employment tax.
  • Form 1040: report adjusted gross income and claim the one-half SE tax deduction.
  • Form 1040-ES: use for making quarterly estimated tax payments.

For more detail on computing SE tax amounts, see our glossary page on Schedule SE (Self-Employment Tax).

See also guidance on reporting 1099 income and contractor rules in our article on Independent Contractor Taxes: 1099 Contractors and Self-Employment Tax.

Tax planning strategies that reduce overall tax pain (not tax evasion)

  • Keep meticulous records: Expense documentation (receipts, bank records, mileage logs) reduces mistakes and supports deductions during an audit.
  • Retirement plans: Contributions to a SEP-IRA, SIMPLE IRA, or Solo 401(k) reduce taxable income and can lower estimated tax liabilities. These plans also let you save for retirement as both employee and employer.
  • Entity choice: In some cases, electing S corporation status or forming an LLC and electing S corp taxation can reduce the amount of income subject to self-employment tax by allowing part of income to be taken as reasonable salary and the rest as distributions. This is a complex area—see our piece on Using Entity Structures to Reduce Self-Employment Taxes for deeper context and tradeoffs.

Note: Changes in entity type have downstream payroll, tax filing, and state-law implications. Consult a qualified tax advisor before changing entity status.

Common mistakes and how to avoid them

  • Underestimating quarterly payments: Frequent source of penalties. Estimate conservatively and adjust quarterly when income changes.
  • Treating non-business receipts as self-employment income: Hobby income and certain passive receipts may not be subject to SE tax. Follow IRS guidance on hobby vs. business.
  • Forgetting the 92.35% adjustment: People sometimes apply tax rates directly to net profit instead of the reduced amount required by the IRS.
  • Overlooking the Additional Medicare Tax: High earners must calculate and report the 0.9% surtax when thresholds are exceeded.

When you might not owe self-employment tax

  • Net earnings below $400 in the tax year: SE tax does not apply.
  • Active S corporation shareholders: Wages paid to an owner-employee are subject to payroll taxes, and distributions may not be subject to SE tax; but the IRS requires that owner-employees receive reasonable compensation.

How to handle audits or IRS questions

If the IRS questions your self-employment income or deductions, provide organized books, receipts, bank statements, and proof of business purpose. Our guide What to Do When the IRS Questions Your Self-Employment Income explains common documentation and responses.

Quick answers: common FAQs

  • Who pays self-employment tax? Anyone with net earnings from self-employment of $400 or more in a year.
  • Can you deduct self-employment tax? You may deduct half of the SE tax as an adjustment to income on Form 1040; it is not an itemized deduction.
  • Do employees and self-employed people earn Social Security credits the same way? Both earn credits, but self-employed individuals must pay SE tax to receive those credits.

Resources and authoritative guidance

Internal FinHelp resources

Professional disclaimer
This content is educational and reflects common U.S. federal tax rules as described by the IRS as of 2025. It is not individualized tax advice. For decisions that affect your tax liability, entity choice, or payroll obligations, consult a licensed CPA, enrolled agent, or tax attorney.

Author note
In my practice I often see freelancers underestimate quarterly payments during high-growth years; conservative estimated payments and early retirement contributions usually prevent underpayment penalties and create predictable cash flow for tax obligations.