How Self-Employment Tax Is Calculated, Step by Step, With 2025 and 2026 Numbers

The first year you work for yourself, the income tax usually is not what shocks you. It is the line on Schedule SE. People who never thought about Social Security and Medicare tax suddenly owe thousands of dollars of it.

That is not a penalty and it is not a mistake. It is self-employment tax. Once you see how it is built, you can plan for it instead of getting ambushed by it.

What self-employment tax is

When you work for an employer, Social Security and Medicare tax is split. The employer pays half and withholds the other half from your pay. When you work for yourself, there is no employer, so the Internal Revenue Code charges you both halves through the self-employment tax in Chapter 2 of the Code.

IRC Section 1401 sets the rates:

• 12.4% for old-age, survivors, and disability insurance, which is Social Security, under Section 1401(a).
• 2.9% for hospital insurance, which is Medicare, under Section 1401(b)(1).

That adds up to 15.3%. For higher earners, Section 1401(b)(2) adds a 0.9% Additional Medicare Tax, which we cover separately in the Additional Medicare Tax for the self-employed.

Step 1: Start with net profit

Self-employment tax is not charged on your gross receipts. It is charged on net earnings from self-employment, which under IRC Section 1402(a) is generally your gross income from the business minus the deductions attributable to it. For most freelancers and gig workers, that starts with the net profit on Schedule C.

This is why your business deductions matter twice. Every legitimate expense lowers both income tax and self-employment tax. Every expense you cannot prove raises both.

Step 2: Multiply by 92.35%

An employee does not pay Social Security and Medicare tax on the employer's half. To put the self-employed on similar footing, IRC 1402(a)(12) lets you reduce net earnings by an amount equal to one-half of the combined 15.3% rate, which is 7.65%. What is left is 92.35% of your net profit. That is why Schedule SE has you multiply by 0.9235.

Step 3: Apply the $400 floor

Under IRC 1402(b)(2), if your net earnings from self-employment are less than $400, you have no self-employment income for the year and no self-employment tax. The 2025 Schedule SE instructions say you must pay self-employment tax if your net earnings are $400 or more. More on that threshold in the $400 rule.

Step 4: Apply the Social Security wage base

The 12.4% Social Security piece only applies up to an annual cap called the contribution and benefit base. IRC 1402(b)(1) ties the cap to the amount set under the Social Security Act, minus any wages you were paid during the year.

Tax year	Social Security wage base	Source
2025	$176,100	2025 Instructions for Schedule SE
2026	$184,500	IRS Publication 15 (2026)

The 2.9% Medicare piece has no cap. It applies to all of your net earnings from self-employment.

Step 5: Do the math

Example 1: a full-time freelancer, 2025

Maria is a freelance designer with no W-2 job. Her 2025 Schedule C net profit is $60,000.

1. Net earnings from self-employment: $60,000 x 92.35% = $55,410.
2. Social Security: $55,410 x 12.4% = $6,870.84. She is under the $176,100 cap, so all of it is taxed.
3. Medicare: $55,410 x 2.9% = $1,606.89.
4. Total self-employment tax: $8,477.73.

That is on top of her regular income tax.

Example 2: a W-2 employee with a side business, 2025

James earns $150,000 in W-2 wages, and his employer withheld Social Security tax on all of it. He also has $50,000 of Schedule C profit from consulting.

1. Net earnings from self-employment: $50,000 x 92.35% = $46,175.
2. Room left under the 2025 wage base: $176,100 minus $150,000 of wages = $26,100.
3. Social Security: $26,100 x 12.4% = $3,236.40.
4. Medicare: $46,175 x 2.9% = $1,339.08.
5. Total self-employment tax: about $4,575.48.

Because his wages already used up most of the Social Security cap, James pays Social Security tax on only part of his side income. He pays Medicare tax on all of it. If you juggle a job and a side gig, see W-2 job plus side gig for how to handle the withholding.

Self-employment tax is not extra. It is the employer's half of the bill, and you are the employer now.

Step 6: Take the deduction for half

You get some of it back. IRC Section 164(f) allows a deduction for one-half of the self-employment tax imposed by Section 1401, other than the 0.9% Additional Medicare Tax. You take that deduction in figuring adjusted gross income, so it reduces your income tax, though not the self-employment tax itself.

For Maria, that is half of $8,477.73, or about $4,238.87, deducted from her income.

Married couples do not combine

If you file a joint return, IRC Section 6017 says the self-employment tax is not computed on combined income. It is the sum of each spouse's tax computed on that spouse's own self-employment income. Each spouse with a business files a separate Schedule SE. If you and your spouse run a business together, read about the qualified joint venture election.

The optional methods

Schedule SE also offers optional methods that let some people with low or irregular earnings report a higher amount of net earnings than their actual profit. For 2025, the instructions limit the nonfarm optional method to people with net nonfarm profits under $7,840 that are also less than 72.189% of gross nonfarm income, who were regularly self-employed, and cap the amount you can report at $7,240. The instructions also say the nonfarm method can be used for only five years. It is a niche tool, but it exists.

How you pay it

Nobody withholds self-employment tax for you. It is figured on Schedule SE, carried to your Form 1040, and paid with the rest of your tax. If you expect to owe, the IRS expects you to pay during the year through estimated payments. Our guide to quarterly estimated tax deadlines covers the calendar.

A simple habit helps more than any formula. Every time a client or app pays you, move a percentage into a separate tax account. The examples above show why the number needs to be larger than most people guess.