Self-Employment Tax
Last reviewed 2026-05-11 by Asad Ali, Founder & CEO
Social Security and Medicare taxes paid by self-employed individuals on net earnings.
Self-employment tax (SE tax) is the combined Social Security (12.4%) and Medicare (2.9%) tax that self-employed individuals pay on their net earnings from self-employment. It exists because self-employed workers cover both the employer and employee halves of FICA — what an employer normally splits 50/50 with a W-2 employee. The 12.4% Social Security component applies only to net SE earnings up to the annual wage base (combined with any W-2 wages; verify the current year's wage base with the IRS as it adjusts annually for inflation). The 2.9% Medicare component applies to all net SE earnings with no cap, and an Additional Medicare Tax of 0.9% applies above $200,000 (single) / $250,000 (joint). SE tax is calculated on Schedule SE and applies only when net SE earnings reach $400 or more in the year. Net SE earnings are multiplied by 92.35% (the 7.65% reduction approximates the employer portion that a W-2 worker would not pay tax on) before applying the SE tax rate. One-half of SE tax is deductible as an above-the-line adjustment on Schedule 1, reducing AGI. See IRS Schedule SE instructions and Publication 334.
Formula
Net SE Earnings × 92.35% = SE Earnings Base. SE Tax = (SE Earnings Base × 12.4% up to SS wage base) + (SE Earnings Base × 2.9%). Deductible Adjustment = SE Tax ÷ 2.Example
A freelance graphic designer reports $80,000 in net profit on Schedule C. SE tax calculation: $80,000 × 92.35% = $73,880 (the "SE earnings base"). SE tax = $73,880 × 15.3% = $11,304 — flows to Form 1040 Schedule 2. The deductible half = $11,304 ÷ 2 = $5,652 — claimed on Schedule 1, line 15, reducing AGI. If the designer was also a W-2 employee earning $90,000 in wages that paid Social Security on the full amount, the SE Social Security portion would still apply to net SE earnings until combined wages + SE earnings reached the wage base. The Medicare portion (2.9%) applies regardless of W-2 wages.
Why It Matters for Your Business
SE tax is often the biggest shock to new freelancers — 15.3% in addition to federal income tax means setting aside roughly 25–35% of every dollar for combined federal taxes alone, before state and local taxes are added.
Practical Tips
- •Set aside 30% of every client payment for combined federal tax (income + SE) — the "SE tax surprise" each April is one of the biggest cash flow shocks for new freelancers
- •Always claim the half-SE-tax deduction on Schedule 1 line 15 — it is automatic in tax software but easy to miss on hand-prepared returns
- •When Schedule C net profit reliably exceeds $50,000–$60,000, model an S-corp election — splitting income into W-2 salary (FICA) and distributions (no SE tax) typically saves $3,000–$10,000+ per year
- •Use IRS Form 1040-ES to project SE tax quarterly — it is the largest component of estimated tax obligations for most freelancers, easily eclipsing income tax
Common Questions About Self-Employment Tax
How is self-employment tax calculated?
The formula is: Net SE Earnings × 92.35% = SE Earnings Base. SE Tax = (SE Earnings Base × 12.4% up to SS wage base) + (SE Earnings Base × 2.9%). Deductible Adjustment = SE Tax ÷ 2.. See the worked example below for a step-by-step calculation using realistic numbers.
What is an example of self-employment tax?
A freelance graphic designer reports $80,000 in net profit on Schedule C. SE tax calculation: $80,000 × 92.35% = $73,880 (the "SE earnings base"). SE tax = $73,880 × 15.3% = $11,304 — flows to Form 1040 Schedule 2. The deductible half = $11,304 ÷ 2 = $5,652 — claimed on Schedule 1, line 15, reducing AGI. If the designer was also a W-2 employee earning $90,000 in wages that paid Social Security on the full amount, the SE Social Security portion would still apply to net SE earnings until combined wages + SE earnings reached the wage base. The Medicare portion (2.9%) applies regardless of W-2 wages.
Why does self-employment tax matter for my business?
SE tax is often the biggest shock to new freelancers — 15.3% in addition to federal income tax means setting aside roughly 25–35% of every dollar for combined federal taxes alone, before state and local taxes are added.
How does FiscalInsights help with self-employment tax?
FiscalInsights tracks self-employment tax automatically as part of its AI bookkeeping workflow. Connect your bank accounts and the platform handles categorization, reconciliation, and reporting without manual entry.
Related Terms
More Taxes Terms
Tax Deduction
An expense that reduces taxable income.
Estimated Taxes
Quarterly tax payments made by self-employed individuals and businesses.
Form 1099
IRS forms reporting various types of income other than wages.
Form W-2
Annual statement from employers showing employee wages and taxes withheld.
Payroll Tax
Taxes withheld from employee wages for Social Security and Medicare, plus employer-side employment taxes.
Related Taxes Guides
Automate Your Finances with AI
FiscalInsights uses AI to automate bookkeeping, track expenses, and forecast cash flow — so you can focus on your business.
Start Free Trial