Self-employment tax: how it's calculated and how to reduce it

Self-employment tax (SE tax) is the self-employed person’s version of FICA — the Social Security and Medicare taxes that employees pay through payroll withholding. The difference is that employers pay half of FICA on behalf of their employees. When you’re self-employed, you pay both halves yourself. The result is a tax rate that surprises many first-time freelancers.

The two components

SE tax has two pieces:

• Social Security (OASDI): 12.4% on net self-employment income up to the Social Security wage base. The 2026 wage base is $176,100. Income above this threshold is not subject to Social Security tax.
• Medicare (HI): 2.9% on all net self-employment income with no cap. High earners (single filers over $200,000, married filing jointly over $250,000) pay an additional 0.9% Additional Medicare Tax on the amount above the threshold.

Combined rate below the wage base: 15.3%. Above the wage base: 2.9% (or 3.8% with the Additional Medicare Tax).

The 0.9235 multiplier

SE tax is not assessed on your full net self-employment income. Instead, it applies to net income × 0.9235. Why? Because employees’ FICA is calculated on wages before the employer’s share is added — the employer’s half is not income to the employee. The 0.9235 multiplier (1 − 0.0765) is IRS’s approximation of the same adjustment for the self-employed. It reduces the base slightly before the 15.3% rate applies.

Worked example: Net SE income = $120,000

1. SE tax base: $120,000 × 0.9235 = $110,820
2. Social Security (below $176,100 wage base): $110,820 × 12.4% = $13,742
3. Medicare: $110,820 × 2.9% = $3,214
4. Total SE tax: $16,956

The half-SE deduction

You can deduct half of your SE tax from gross income on Schedule 1 (Form 1040). This deduction exists because the employer’s half of FICA is deductible by employers as a business expense — the half-SE deduction gives self-employed people equivalent treatment. This deduction reduces your income tax but not your SE tax.

Continuing the example:

• Half-SE deduction: $16,956 / 2 = $8,478
• This $8,478 reduces your adjusted gross income, saving you federal income tax at your marginal rate.

S-corporation comparison

One common strategy to reduce SE tax is to elect S-corporation status and pay yourself a “reasonable salary.” FICA applies only to the salary, not to S-corp distributions. If you earn $120,000 net and pay yourself a $60,000 salary (plausibly reasonable for your work), SE tax applies only to the $60,000 salary — roughly halving the SE tax burden. The S-corp calculator on this site models the breakeven point, since S-corps add filing costs that must be weighed against the tax savings.

Retirement plan contributions

Contributions to a SEP-IRA, Solo 401(k), or SIMPLE IRA reduce net self-employment income before the SE tax base is calculated for income tax purposes — but SE tax itself is calculated on net Schedule C income before retirement deductions. The retirement deduction reduces income tax but not SE tax directly. The indirect benefit is that a larger retirement contribution in a high-earning year reduces your AGI and may drop you into a lower marginal bracket.

Quarterly estimates

SE tax is not withheld — you pay it through quarterly estimated tax payments (Form 1040-ES). Missing or underpaying estimates results in an underpayment penalty even if you pay the full amount at year-end. The quarterly tax calculator on this site computes your SE tax, estimates your income tax, and outputs the payment due for each quarter.