When you freelance, contract, or run a small business, no employer withholds taxes or pays half your payroll tax. You handle all of it. That sounds daunting, but the system is logical once you see its three layers: self-employment tax, income tax, and the deductions that shrink both. This guide builds the picture from the ground up.
Why the self-employed pay "extra" tax
Every worker owes Social Security and Medicare tax. For employees it is split: the worker pays 7.65% and the employer pays a matching 7.65%. When you are self-employed you are both parties, so you pay the full 15.3% yourself. That is self-employment (SE) tax — and it is separate from, and on top of, income tax.
| Component | Rate | 2026 limit |
|---|---|---|
| Social Security | 12.4% | Applies to net earnings up to $184,500 |
| Medicare | 2.9% | No cap — all net earnings |
| Additional Medicare | +0.9% | Net earnings over $200,000 (single) / $250,000 (joint) |
The 92.35% adjustment
You do not pay SE tax on your full profit. First multiply net profit by 0.9235 (92.35%). This removes the "employer half" of the tax from the base, paralleling how a normal business deducts its share of payroll tax. So $50,000 of net profit becomes $46,175 of net earnings subject to the 15.3% rate, for about $7,065 of SE tax. The self-employment tax calculator performs this exact computation.
A worked example
Maria freelances and nets $60,000 after business expenses. Her SE tax base is $60,000 × 0.9235 = $55,410. SE tax is $55,410 × 15.3% = $8,478. She deducts half of that ($4,239) above the line. She also qualifies for the QBI deduction of 20% × $60,000 = $12,000. So her income-tax base starts well below $60,000 — roughly $60,000 − $4,239 − $12,000 − her standard deduction. The SE tax is fixed at $8,478, but smart use of deductions can cut her income tax to a few hundred dollars.
The QBI deduction — the self-employed's best friend
The Qualified Business Income (QBI) deduction lets most pass-through and self-employed taxpayers deduct up to 20% of qualified business income from taxable income. It is not a business expense — it is a separate deduction taken on your 1040, and it does not reduce SE tax, only income tax. For 2026, full benefits flow below taxable income of about $201,775 (single) / $403,550 (joint); above those thresholds, limits based on wages, property, and whether you run a "specified service" business (law, health, consulting, etc.) begin to apply.
Deductible business expenses
Every ordinary and necessary business expense reduces your net profit — and therefore both SE tax and income tax. Common deductions:
- Home office — a portion of rent, utilities, and insurance, or the $5/sq ft simplified method (up to 300 sq ft).
- Vehicle — the standard mileage rate (72.5¢/mile for 2026) or actual costs; see our vehicle deduction guide.
- Health insurance premiums — self-employed health insurance is deductible above the line.
- Retirement contributions — a SEP-IRA or Solo 401(k) lets you shelter far more than a regular IRA.
- Equipment, software, supplies, professional fees, and the business share of your phone and internet.
Keep contemporaneous records and a separate business bank account. The difference between $60,000 and $48,000 of net profit — entirely from legitimate expenses — is roughly $1,850 in SE tax alone.
Quarterly estimated taxes
Because nothing is withheld, the IRS expects payments four times a year. Miss them and you can owe an underpayment penalty even if you pay in full at filing. The safe-harbor rules and due dates are covered in our estimated taxes guide; a common rule of thumb is to set aside 25–30% of every payment in a separate account.
Putting it together
Your total self-employment tax bill is SE tax (fixed by profit) plus income tax (reduced by the half-SE deduction, QBI, retirement contributions, and the standard or itemized deduction). The order matters: maximize business expenses first, then retirement contributions, then let QBI and the standard deduction finish the job. Run your own numbers in the self-employment tax calculator, and if you also hold a W-2 job, coordinate withholding using your W-4 so the two incomes don't collide in April.
When an S-corp election can help
Once a business is consistently profitable — often around $80,000–$100,000 of net profit — electing S-corporation status can reduce self-employment tax. The owner pays themselves a "reasonable salary" subject to payroll tax, while remaining profit is distributed as a draw that escapes the 15.3% SE tax. The savings must outweigh the added cost of payroll, a separate return, and IRS scrutiny of the salary, so it is a decision for a tax professional. Below that profit level, a sole proprietorship or single-member LLC is usually simpler and just as efficient.
Key takeaways
- Self-employment tax is 15.3% on 92.35% of net profit.
- Deduct half of SE tax above the line, and up to 20% of profit via QBI.
- Business expenses cut both SE tax and income tax — track them rigorously.
- A SEP-IRA or Solo 401(k) shelters far more than a regular IRA.
- At higher profits, an S-corp election may lower the SE-tax bill.