Self-Employment Tax

What Is Self-Employment Tax?

In the United States, self-employment (SE) tax is the FICA (Federal Insurance Contributions Act) equivalent for self-employed individuals — covering Social Security and Medicare contributions. When you are an employee, these contributions are split 50/50 between you and your employer. When you are self-employed, you pay both halves yourself.

The term is specifically a US tax concept, but the underlying challenge — higher payroll-type contributions for the self-employed — applies in many countries, including the UK (Class 4 NI), Canada (CPP), Australia, and India (no mandatory social contribution, but other considerations).

US Self-Employment Tax Rates (2026)

Component	Rate	Income Cap
Social Security (employer + employee)	12.4%	$176,100 (2026 estimated)
Medicare (employer + employee)	2.9%	Unlimited
Total SE Tax	15.3%	Up to SS wage base
Medicare (above SS wage base)	2.9%	Unlimited
Additional Medicare Tax	0.9%	On net SE income > $200,000 (single)

For a self-employed person earning $100,000 net, SE tax = $100,000 × 92.35%* × 15.3% = $14,130

*The 92.35% factor (= 1 − 7.65%) accounts for the deduction of the employer’s “half” of SE tax from the base.

The SE Tax Deduction

To partially offset the double FICA burden, the IRS allows self-employed individuals to deduct 50% of SE tax from gross income as an “above-the-line” deduction on Schedule 1 of Form 1040. This reduces the income subject to income tax (but not the SE tax base itself).

Example:

• Net self-employment income: $80,000
• SE tax: $80,000 × 0.9235 × 15.3% = $11,304
• SE tax deduction: $11,304 × 50% = $5,652
• Adjusted Gross Income (AGI) reduced by $5,652 → income tax calculated on ~$74,348

This deduction is valuable but does not fully equalise the burden with employees, who pay only 7.65% (employers absorb the other 7.65%).

Quarterly Estimated Tax Payments

Because no employer is withholding SE tax or income tax, self-employed individuals must make quarterly estimated tax payments (IRS Form 1040-ES) by:

• April 15 (Q1: January–March)
• June 15 (Q2: April–May)
• September 15 (Q3: June–August)
• January 15 of following year (Q4: September–December)

Failure to pay sufficient estimated taxes results in an underpayment penalty (currently charged at the federal short-term rate + 3%). To avoid penalties, ensure you pay the lesser of:

• 100% of prior year’s tax liability (110% if prior year AGI > $150,000), or
• 90% of current year’s expected tax liability

Business Deductions that Reduce SE Tax

SE tax is calculated on net self-employment income — gross business income minus ordinary and necessary business expenses. Reducing net income reduces SE tax dollar for dollar:

• Home office deduction (must be exclusive use)
• Business equipment and technology (Section 179 immediate expensing or bonus depreciation)
• Business vehicle mileage ($0.67/mile in 2025; adjust for 2026 rate)
• Professional development and education
• Health insurance premiums (self-employed health insurance deduction under Section 162(l))
• Retirement plan contributions (SEP-IRA, Solo 401(k), SIMPLE IRA)

SEP-IRA and Solo 401(k) are particularly powerful: a self-employed person can contribute up to 25% of net SE income (SEP-IRA) or up to $69,000 (Solo 401(k)) in 2025, reducing both income tax and slightly reducing the SE tax base.

S-Corporation Strategy

One advanced approach to reducing SE tax is electing S-Corporation status. An S-corp can pay the owner-employee a “reasonable salary” (subject to FICA/SE tax), but remaining profits flow through as distributions (not subject to SE tax).

Example:

• Self-employed income: $200,000
• As sole proprietor: SE tax on ~$184,700 ≈ $26,000
• As S-corp paying $100,000 salary + $100,000 distribution:
  • FICA on salary: ~$15,300 (split employer/employee)
  • No SE tax on $100,000 distribution
  • Net saving: ~$11,000+ (offset by S-corp formation and payroll admin costs)

The IRS scrutinises S-corps with unreasonably low salaries. The salary must be “reasonable compensation” for the services rendered.

Self-Employment Social Contributions in Other Countries

United Kingdom

Self-employed individuals pay:

• Class 2 NI: £3.45/week (effectively abolished for most from April 2024, but benefit entitlement preserved)
• Class 4 NI: 6% on profits £12,570–£50,270; 2% above

Class 4 rates are lower than employed Class 1 (8%/2%), partly reflecting that the self-employed do not benefit from employer NI-funded benefits in the same way.

Canada

Self-employed individuals pay both employee and employer shares of CPP — 10.8% total on earnings between the minimum and maximum (roughly CA$3,500–CA$68,500 for 2026). This is equivalent to the US SE tax situation.

Australia

There is no mandatory social security contribution equivalent for self-employed Australians. Superannuation (11.5% employer contribution) is funded by employers for employees — self-employed people must make voluntary super contributions if they want equivalent retirement savings. They may still claim a tax deduction for personal super contributions up to the concessional cap.

India

Self-employed individuals in India are not subject to EPF contributions (EPF applies to employees of organizations with 20+ workers). However, they may choose to contribute to the National Pension System (NPS) and claim deductions under Section 80CCD.

Key Takeaway

Self-employment tax in the US adds 15.3% (on incomes up to the Social Security wage base) to the income tax burden — the equivalent of paying both sides of FICA. Combined with income tax, a self-employed person in the 22% bracket faces a combined marginal rate of ~37%. Quarterly estimated payments, business deductions, and retirement contributions are the primary tools for managing this burden. Use the US income tax calculator to estimate your federal income tax, and factor in SE tax separately for your total liability.