Self-Employment Tax Explained: What You Really Owe and How to Plan for It

The first time a freelancer sees their tax bill, the surprise is rarely the income tax. It is a second line called self-employment tax, and it arrives on top. Salaried workers do not see it as a separate bill, because their employer pays half through payroll.

Here is exactly how it works, what it costs at different income levels, and how to plan for it before it plans your year for you.

Key takeaways

• The self-employment (SE) tax rate is 15.3%: 12.4% for Social Security plus 2.9% for Medicare.
• It is charged on net earnings, which is 92.35% of your net profit, so the real rate on profit is about 14.13%.
• In 2026 the Social Security part applies only to the first $184,500 of earnings. Medicare has no cap.
• You can deduct half of your SE tax when working out income tax, and the IRS says you generally must file Schedule SE if your net SE earnings are $400 or more.
• Build the tax into your prices. A freelancer with the same profit as an employee's salary pays much more payroll tax.

What self-employment tax is

The IRS states the rate as 15.3%, made up of 12.4% for Social Security and 2.9% for Medicare. If your net earnings from self-employment are $400 or more, you generally have to file Schedule SE.

The problem

An employee earning $80,000 has 7.65% withheld for Social Security and Medicare, which is $6,120. Their employer pays the matching 7.65%, and the employee often does not see it as a separate cost.

A freelancer with $80,000 of profit pays both halves. The bill is not $6,120. It is about $11,304, an extra $5,184. Many first-year freelancers set money aside for income tax and forget this second tax entirely.

Why it is hard to plan for

• Nothing is withheld. No one takes the tax out of a client payment, so it falls to you to set it aside.
• The formula is not obvious. Two percentages, a 92.35% adjustment, a cap and a deduction all interact.
• It is due in instalments. Most freelancers pay estimated tax during the year, so a year of under-saving arrives as several bills, not one.
• It hides inside pricing. If your rates were built from an old salary, they may not cover the tax you now carry.

The gap in most explanations

Most articles stop at "it's 15.3%." That number is easy to remember and slightly wrong for planning, for two reasons.

1. The base is 92.35% of profit, not 100%. The IRS lets you multiply net profit by 92.35% first, which mirrors the fact that an employer's half is not part of an employee's wages. Applied to profit, 15.3% × 92.35% is about 14.13%.
2. Half of the tax is deductible. That deduction lowers your income tax, so the true after-deduction cost is a little lower again.

There is also a cap. The Social Security part stops once your earnings reach the annual limit, which the Social Security Administration sets at $184,500 for 2026. Medicare tax has no limit, and an extra 0.9% Medicare tax applies above certain income levels ($200,000 for single filers, $250,000 for married filing jointly, per the IRS).

The plot: what it costs at different profits

This chart compares what an employee pays in payroll tax on the same amount with what a self-employed person pays. It uses the 2026 rates and the 92.35% adjustment. It is a calculation, not a survey.

Employee share (7.65%)Self-employed (15.3% of 92.35%)

$30,000

$2,295

$4,239

$60,000

$4,590

$8,478

$80,000

$6,120

$11,304

$120,000

$9,180

$16,955

Calculated from the rates above; rounded to the nearest dollar. The employee column ignores the employer's matching half, which is part of what employers pay to employ someone.

The gap widens as income grows, and in this calculation it is about 1.85 times the employee's share at every level. That ratio is why freelancers cannot copy an employee's take-home pay into a rate card.

Market context: why this matters for pricing

Freelance income is now common. Upwork's survey estimated that 64 million Americans did some freelance work in 2023 (its own broad definition, including side work). Many of them price by copying a salary or a competitor's rate, and neither includes the extra payroll tax. That is the gap between "I made $80,000" and "I kept $80,000 minus a bill I did not plan for."

A strategy: three moves

1. Know your planning rate. For quick planning, treat SE tax as about 14% of net profit, then add your income tax on top.
2. Save on arrival. Move a fixed percentage of every payment into a separate tax account the day it lands.
3. Price for it. Include the tax in your rates instead of hoping it fits inside your margin.

A common starting heuristic is to set aside 25% to 30% of net profit for combined federal income and SE tax. That is a rule of thumb, not an IRS rule. Your real number depends on your bracket, state and deductions, so refine it with your accountant.

Step-by-step solution: the worked example

Say your net profit for the year is $80,000 (revenue minus business expenses).

Step	Calculation	Result
1. Net earnings from self-employment	$80,000 × 92.35%	$73,880
2. Social Security part	$73,880 × 12.4%	$9,161.12
3. Medicare part	$73,880 × 2.9%	$2,142.52
4. Total SE tax	$9,161.12 + $2,142.52	$11,303.64
5. Deductible half	$11,303.64 ÷ 2	$5,651.82

That last line lowers your taxable income. At a 22% federal bracket, the deduction is worth about $1,243 in income tax.

Now the cap. Suppose your profit is $200,000. Your net earnings are $184,700. Social Security applies only up to $184,500, so that part is $184,500 × 12.4% = $22,878. Medicare applies to all $184,700, giving $5,356.30. The total is $28,234.30, roughly 14.1% of profit. The cap barely dents the bill at this level because Medicare keeps growing.

Ways to reduce it (legally)

• Track every legitimate business expense. SE tax is charged on profit, so real expenses reduce it directly.
• Take the half-of-SE-tax deduction, which lowers income tax.
• Understand what does not help. Contributions to a Solo 401(k), SEP IRA or HSA lower your income tax, but they do not reduce net earnings for SE tax.
• Consider an S corporation only after modelling it. Paying yourself a reasonable salary plus distributions can lower payroll taxes at higher profits, but it adds payroll costs, filings and audit attention. It is worth a conversation with a CPA, not a guess.

Common mistakes

• Saving for income tax and forgetting SE tax
• Treating 15.3% as 15.3% of revenue
• Paying yourself from the business with no records, then estimating profit from memory
• Assuming an LLC on its own removes SE tax (it does not)
• Underpaying during the year and facing several bills at once

Frequently asked questions

Do I pay SE tax on gross revenue?

No. It is charged on net earnings, which start from net profit (revenue minus allowable business expenses) and are then multiplied by 92.35%.

What if I earn less than $400?

The IRS generally requires Schedule SE only when net earnings from self-employment are $400 or more.

Does SE tax help my Social Security benefits?

Yes. Earnings you pay Social Security tax on count toward your earnings record, which is used to work out future benefits.

Is SE tax the same as estimated tax?

No. SE tax is one component of what you owe. Estimated tax payments are the instalments you make during the year toward your total income tax and SE tax.

Do I stop paying once I hit the Social Security cap?

The 12.4% Social Security part stops at the annual cap ($184,500 in 2026). The 2.9% Medicare part continues, and an extra 0.9% can apply above certain income levels.

Sources and further reading

1. IRS: Self-employment tax (Social Security and Medicare taxes)
2. IRS: Instructions for Schedule SE — the 92.35% adjustment and worksheet
3. Social Security Administration: contribution and benefit base — the $184,500 cap for 2026
4. Upwork: 64 million Americans freelanced in 2023

Educational content, not tax advice. Rates and limits change; the figures above are the 2026 amounts. Check current rules with the IRS or a qualified tax professional.