Self-Employment Tax (15.3%): What It Is and How to Lower It

Short answer: Self-employment tax is a 15.3% tax on net self-employment earnings that funds Social Security and Medicare, covering the portions an employer would normally pay for a W-2 worker. In 2026, the 12.4% Social Security portion applies to net earnings up to $184,500, and the 2.9% Medicare portion applies to all net earnings with no cap. You can lower it by claiming every business deduction, since the tax is based on profit, not revenue.

The first year you are self-employed, this tax is usually the surprise. Understanding how it works — and where the legitimate levers are — helps you plan for it instead of getting blindsided.

What is self-employment tax?

Self-employment (SE) tax is the self-employed person’s version of the Social Security and Medicare taxes that are automatically withheld from a paycheck. When you work for an employer, you pay half and the employer pays half. When you work for yourself, you pay both halves.

That is why the rate feels high: it is not an extra penalty on freelancers, it is the full contribution that a W-2 worker only sees half of. The IRS explains SE tax at irs.gov.

How is the 15.3% self-employment tax broken down?

The 15.3% rate has two parts, each with its own rules for 2026.

Portion	Rate	Applies to (2026)
Social Security	12.4%	Net self-employment earnings up to $184,500
Medicare	2.9%	All net self-employment earnings (no cap)
Combined	15.3%	Net earnings up to the Social Security wage base

Two extra details matter:

• SE tax is calculated on about 92.35% of your net profit, not 100%, because of a built-in adjustment.
• High earners pay an additional 0.9% Medicare tax on earnings above $200,000 (single) or $250,000 (married filing jointly).

Who has to pay self-employment tax?

You generally owe SE tax if your net earnings from self-employment are $400 or more for the year. This includes freelancers, gig workers, independent contractors, sole proprietors, and most single-member LLC owners.

The $400 threshold is low on purpose. Even a modest side hustle can trigger SE tax, so do not assume small income is exempt.

How do I calculate self-employment tax?

The calculation follows a short sequence on Schedule SE:

1. Start with your net profit from Schedule C.
2. Multiply by 92.35% to get the amount subject to SE tax.
3. Apply 15.3% (up to the Social Security wage base; 2.9% Medicare continues above it).
4. That result is your self-employment tax.
5. Deduct half of it as an adjustment to income on your Form 1040.

For example, on $50,000 of net profit: $50,000 × 92.35% = $46,175, and $46,175 × 15.3% ≈ $7,065 in SE tax. About half of that ($3,532) is then deductible against your income tax.

How can I legally lower my self-employment tax?

Because SE tax is based on net profit, the most direct way to reduce it is to reduce your taxable profit through legitimate deductions. Ways 1099 workers commonly lower the bill:

• Claim every business deduction. Mileage, home office, supplies, software, and insurance all shrink the profit SE tax is based on.
• Track mileage precisely. At 72.5¢ per mile for 2026, documented business miles directly cut taxable profit.
• Keep thorough receipts. Unclaimed expenses mean you are paying SE tax on money you actually spent on the business.
• Consider retirement contributions. SEP-IRA or Solo 401(k) contributions lower income tax (note: they reduce income tax, not SE tax, but are still valuable).
• Deduct half of your SE tax. This is automatic and lowers your income tax.
• Explore an S-corp election if you earn enough. At higher, stable income, an S-corporation structure can reduce the earnings subject to SE tax, though it adds payroll and compliance costs — a decision for a tax professional.

The theme is documentation. Deductions you cannot prove are deductions you cannot safely take.

Why does tracking expenses matter so much for SE tax?

Consider two freelancers who each gross $60,000. One tracks $12,000 in real business expenses; the other tracks nothing. The first is taxed on $48,000 of profit; the second on $60,000. On the difference alone, the disorganized freelancer overpays SE tax by well over a thousand dollars — for expenses they actually incurred.

Records are not busywork. They are the mechanism that keeps you from overpaying.

Keel: Invoice Maker & Receipts makes that record-keeping simple enough to actually keep up with. It captures receipts on your iPhone (the app proposes the details from a scan and you approve them), logs mileage at the 2026 IRS rate of 72.5¢ per mile, and creates invoices so your income and profit are clear. Everything is stored encrypted on your device — no bank connection, no cloud, no account — and exports as one file at tax time. Keel is not an automated bank-linked all-in-one; the honest tradeoff for that privacy is a little manual entry, which many solo workers find is a fair price for owning their data. Get Keel on the App Store.

Frequently asked questions

Is self-employment tax on top of income tax? Yes. SE tax (15.3%) funds Social Security and Medicare and is separate from federal and state income tax. Most 1099 workers owe both on the same profit.

Do I pay self-employment tax if I have a W-2 job too? Yes, on your self-employment earnings of $400 or more. Wages already taxed through your W-2 job count toward the Social Security wage base, which can affect the Social Security portion on your self-employment income.

Can deductions reduce my self-employment tax? Yes. Business deductions lower your net profit, and SE tax is calculated on net profit. Retirement contributions, by contrast, lower income tax but not SE tax.

What is the additional Medicare tax? It is an extra 0.9% Medicare tax on earnings above $200,000 (single) or $250,000 (married filing jointly). It applies on top of the standard 2.9% Medicare portion.

Does forming an S-corp always cut self-employment tax? Not always. An S-corp can reduce earnings subject to SE tax at higher, stable incomes, but it adds payroll, tax filings, and costs. Whether it saves money depends on your numbers — consult a tax professional.

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This article is general information, not tax advice. Consult a qualified tax professional.