Self-Employment Tax Explained: How It Works and How to Calculate It (2026)

The first tax season after leaving a job surprises many new business owners. They expected income tax. They did not expect a second tax of about 15% on their profit. That is self-employment tax, and it exists because, as an employee, your employer paid half of your Social Security and Medicare. Now you pay both halves. This guide explains how self-employment tax works in 2026 and how to calculate and plan for it.

Warning: This is general information, not tax advice. Figures are as of 2026; verify at IRS.gov and with a tax professional.

What self-employment tax is

Self-employment tax is Social Security and Medicare tax for people who work for themselves. It is calculated on Schedule SE and paid with your federal income tax return, usually through quarterly estimated payments during the year.

The 2026 rules at a glance

How to calculate it, step by step

Step 1: Find net self-employment earnings

Start with net profit from your business: income minus deductible business expenses. For a sole proprietor or single-member LLC taxed as a sole proprietorship, that is the bottom line of Schedule C.

Step 2: Multiply by 92.35%

This adjustment mirrors the fact that employees do not pay Social Security and Medicare on the employer's half.

Step 3: Apply the rates

• 12.4% Social Security on earnings up to the wage base (less any W-2 wages already subject to Social Security)
• 2.9% Medicare on all of it

Step 4: Deduct half

Half of the self-employment tax is deducted when calculating adjusted gross income, which lowers your income tax.

Worked example: $80,000 profit

Net profit on Schedule C: $80,000

That $11,304 is in addition to federal income tax and any state income tax. Your income tax depends on filing status, deductions, the qualified business income deduction if you qualify, and any other income, so the combined bill is often well above the SE tax alone.

Worked example: high earner with a W-2 job

Suppose you earn $150,000 in W-2 wages and $60,000 in net self-employment profit.

• Net earnings subject to SE tax: $60,000 × 0.9235 = $55,410
• Social Security room left under the $184,500 wage base: $184,500 − $150,000 = $34,500
• Social Security portion: $34,500 × 12.4% = $4,278
• Medicare portion: $55,410 × 2.9% = $1,606.89
• Self-employment tax: about $5,885

Additional Medicare tax may also apply because combined earnings exceed $200,000 for a single filer. A tax professional or software will calculate this on the return.

Who pays it, by business structure

Partnership rules, especially for limited partners and LLC members who do not work in the business, can be complex. Ask a tax professional how they apply to you.

Ways self-employment tax can be reduced (legitimately)

Track every deductible expense

Self-employment tax is based on net profit. Legitimate business expenses, such as software, equipment, a qualifying home office, business mileage, insurance and professional fees, reduce profit and therefore both income tax and self-employment tax.

Consider an S corporation election when profit is high enough

An LLC can elect to be taxed as an S corporation. The owner then pays themselves a reasonable salary, which is subject to payroll taxes, and may take remaining profit as distributions not subject to self-employment tax. This can save tax at higher profit levels, but it adds payroll, a separate business tax return and extra costs. It usually does not make sense at low profit. Discuss it with a CPA.

Retirement contributions

Contributions to plans such as a SEP-IRA or solo 401(k) can reduce income tax. Note that they generally do not reduce self-employment tax itself, because SE tax is calculated before those deductions.

Tip: Do not form an S corporation just because a social media post said it saves tax. Ask a CPA to run your actual numbers, including payroll costs and reasonable salary.

Planning payments during the year

Self-employment tax is not withheld from client payments. You pay it through quarterly estimated taxes, along with income tax. Practical habits:

• Open a separate savings account for taxes.
• Transfer a set percentage of every payment received. Many owners start around 25% to 30% of profit and adjust with their tax professional.
• Pay estimated taxes on time to reduce underpayment penalties.
• Revisit the percentage when income changes significantly.

2026 estimated tax due dates (verify)

Payments can be made online through IRS Direct Pay or the Electronic Federal Tax Payment System (EFTPS), or through your IRS online account. If a date falls on a weekend or holiday, it moves to the next business day.

Example set-aside

If you receive a $5,000 client payment and your expenses run about 20% of revenue, your profit share is roughly $4,000. Setting aside 28% of that, about $1,120, covers a reasonable estimate of self-employment and income tax for many owners. Your rate may be higher or lower.

Self-employment tax checklist

• ☐ Net profit tracked monthly in your books
• ☐ Every legitimate business expense recorded with receipts
• ☐ Tax savings account opened
• ☐ Set-aside percentage chosen with a professional
• ☐ Quarterly estimated payments on the calendar
• ☐ W-2 wages considered if you also have a job
• ☐ S corporation analysis requested once profit grows

Mistakes to avoid

• Budgeting only for income tax
• Spending client payments before setting aside taxes
• Mixing personal and business expenses, which makes deductions hard to prove
• Electing S corporation status without running the numbers
• Missing estimated payment deadlines

Your next step

Self-employment tax is easier to handle when your books are accurate all year. Bookkeeping & Taxes for Small Business Owners by Omer Muneer Qazi covers separating money, cash vs accrual, chart of accounts, tools, monthly routines, financial statements, how small businesses are taxed, quarterly estimates, deductions, 1099s and payroll, sales tax, S corporation basics and year-end.