When you work as an employee, your employer pays half of your Social Security and Medicare taxes -- 7.65% of your wages -- and you pay the other 7.65% through payroll withholding. When you work for yourself, you pay both halves. That is the self-employment tax: 15.3% on your net self-employment earnings, on top of ordinary income tax. For most new freelancers and independent contractors, this is the biggest tax surprise of their first year.
How Self-Employment Tax Is Calculated
SE tax applies to net self-employment income -- your business revenue minus allowable business expenses. The rate breaks down as:
- 12.4% for Social Security, on net SE income up to the wage base ($176,100 in 2026)
- 2.9% for Medicare, on all net SE income (no cap)
- 0.9% Additional Medicare Tax on net SE income above $200,000 (single) or $250,000 (married filing jointly)
The SE tax is calculated on 92.35% of net self-employment income, not 100%. This adjustment accounts for the fact that employees only pay tax on their share of FICA, not the employer's share. So the effective SE tax rate on your net income is 15.3% x 92.35% = approximately 14.13%.
Worked Example: $60,000 Net Self-Employment Income
- Net SE income: $60,000
- SE tax base: $60,000 x 92.35% = $55,410
- SE tax: $55,410 x 15.3% = $8,478
- Deductible half of SE tax: $8,478 / 2 = $4,239 (reduces your AGI)
- Net SE income after deduction: $60,000 - $4,239 = $55,761 subject to income tax
So on $60,000 of self-employment income, you owe $8,478 in SE tax plus income tax on $55,761 (after the SE tax deduction). At a 22% marginal rate with the standard deduction: income tax of roughly $6,900. Total federal tax burden: approximately $15,378, or about 25.6% of the original $60,000.
The Deductions That Reduce SE Tax
Half of SE tax deduction
You can deduct half of your SE tax as an above-the-line adjustment. This reduces your AGI and therefore your income tax -- but not the SE tax itself.
Business expenses
SE tax is calculated on net self-employment income. Every legitimate business expense reduces the base on which both SE tax and income tax are calculated. Common deductible business expenses: home office (dedicated space used regularly and exclusively for business), business vehicle mileage ($0.70/mile in 2026), health insurance premiums, business software and subscriptions, professional development, business travel, and equipment.
Retirement account contributions
Self-employed individuals can contribute to a SEP-IRA (up to 25% of net SE income, max $70,000), Solo 401(k) (up to $23,500 employee contributions + 25% employer contributions), or SIMPLE IRA. These contributions reduce AGI but not the SE tax base directly -- however, by reducing income tax, they still meaningfully reduce total tax burden.
Quarterly Estimated Tax Payments
Self-employed workers do not have withholding. The IRS expects quarterly estimated payments covering both income tax and SE tax. Miss these and you owe a penalty even if you pay in full at tax time. The 2026 due dates: April 15, June 16, September 15, and January 15, 2027.
A simple approach: set aside 25-30% of every payment you receive in a separate savings account. Pay quarterly estimates from this account. Use our Self-Employment Tax Calculator to find your exact SE tax liability on any net income amount.
The Full Picture: SE Tax + Income Tax + Quarterly Payments
Self-employment tax is only one part of the federal tax obligation for freelancers and independent contractors. Understanding how it interacts with your regular income tax — and how to stay current with quarterly payments — is essential to avoiding a large unexpected bill at filing time.
Your Total Federal Tax Burden as a Self-Employed Person
- Self-employment tax (15.3%): Covers both the employer and employee share of Social Security (12.4%) and Medicare (2.9%). Calculated on 92.35% of net profit.
- Federal income tax: Applied to your net self-employment income (after deducting half of SE tax and other above-the-line deductions) at ordinary income rates through the progressive bracket system.
- Quarterly estimated payments: Both must be pre-paid throughout the year. Missing or under-paying triggers an IRS underpayment penalty.
The 92.35% Rule — Why It Exists
The IRS applies SE tax to 92.35% of your net profit — not 100%. This adjustment exists because W-2 employees only pay FICA tax on their share (7.65%), with the employer paying the other half. The 92.35% factor (100% minus 7.65%) approximates this arrangement for self-employed individuals, so the effective rate on gross profit is lower than 15.3%.
Reducing SE Tax Through Business Structure
Once self-employment income exceeds roughly $50,000–$60,000 per year, it's worth consulting a CPA about whether an S-corporation election makes sense. Under an S-corp structure, you pay yourself a reasonable salary (subject to SE tax) and take additional income as owner distributions — which are not subject to SE tax. The potential savings on the distribution portion can be significant, though there are setup costs and compliance requirements to weigh.
Quarterly Estimated Tax Deadlines
- Q1 2026 (Jan 1 – Mar 31): Due April 15, 2026
- Q2 2026 (Apr 1 – May 31): Due June 16, 2026
- Q3 2026 (Jun 1 – Aug 31): Due September 15, 2026
- Q4 2026 (Sep 1 – Dec 31): Due January 15, 2027
To avoid the underpayment penalty, pay the lesser of 90% of this year's tax or 100% of last year's tax (110% if prior-year AGI exceeded $150,000). Use our SE tax calculator to estimate your quarterly payment, and our estimated tax guide for step-by-step payment instructions.