Self-Employment Tax Explained
When you're employed by a company, your employer pays half (7.65%) of your Social Security and Medicare taxes, and you pay the other half through withholding. As a self-employed person, you pay both halves — 15.3% total on net earnings up to $176,100 (the Social Security wage base for 2026). Above that, only the 2.9% Medicare portion continues.
The good news: you can deduct half of the SE tax from your gross income when calculating your federal income tax. This isn't a credit but a deduction — it reduces your adjusted gross income by half the SE tax amount, reducing income tax proportionally.
| Item | Example ($70,000 gross, $10,000 expenses) |
|---|---|
| Gross self-employment income | $70,000 |
| Business expenses (Schedule C) | −$10,000 |
| Net self-employment income | $60,000 |
| SE tax (15.3% × 92.35% of net) | $8,478 |
| Deduction: half of SE tax | −$4,239 |
| Standard deduction (single) | −$15,000 |
| Taxable income | $40,761 |
SE tax applies to 92.35% of net earnings (net × 0.9235) per IRS rules. Effective SE rate on gross net income is ~14.1%. Source: irs.gov.
Quarterly Estimated Payments
Employed workers have taxes withheld automatically. Self-employed individuals must pay as they go through quarterly estimated tax payments. If you expect to owe more than $1,000 in federal income tax for the year, estimated payments are required to avoid penalties.
2026 quarterly payment due dates:
- Q1 (Jan–Mar): due April 15, 2026
- Q2 (Apr–May): due June 16, 2026
- Q3 (Jun–Aug): due September 15, 2026
- Q4 (Sep–Dec): due January 15, 2027
The safe harbour rule: Pay at least 100% of last year's total tax liability in quarterly instalments (or 110% if your prior year AGI exceeded $150,000) and you avoid the underpayment penalty regardless of what you actually end up owing. This is the easiest approach when income is unpredictable.
Pay via IRS Direct Pay (free) at irs.gov/payments or through EFTPS (Electronic Federal Tax Payment System).
Schedule C Deductions
Every dollar of legitimate business expense deducted from gross income reduces net profit — which reduces both SE tax (at 15.3%) and income tax. This makes business deductions doubly valuable compared to personal deductions.
Common deductible business expenses for freelancers and self-employed individuals:
- Home office: Dedicated workspace can be deducted using the simplified method ($5/sq ft, up to 300 sq ft = $1,500 max) or actual expense method (proportional share of rent/mortgage interest, utilities, insurance).
- Vehicle: Business mileage at the 2026 standard mileage rate of 67 cents per mile, or actual expenses (fuel, insurance, depreciation) proportional to business use.
- Equipment and supplies: Computers, cameras, tools, software — any equipment used for the business. Section 179 allows immediate full deduction rather than multi-year depreciation.
- Professional services: Accountant, lawyer, business consultant fees.
- Software and subscriptions: Business-use software, industry publications, tools.
- Travel: Business travel (flights, hotels, 50% of meals while travelling for business).
- Marketing and advertising: Website, business cards, online ads.
- Professional development: Courses, books, conferences related to your field.
- Phone and internet: Proportional to business use.
Retirement Accounts for the Self-Employed
The self-employed have access to uniquely powerful retirement accounts with very high contribution limits — and all contributions reduce taxable income:
- SEP-IRA: Contribute up to 25% of net self-employment income or $69,000 (2026), whichever is less. Simple to set up, no annual filing requirements. Best for sole proprietors with high income and no employees (or willing to contribute equally for employees).
- Solo 401(k): Allows employee contributions up to $23,500 (2026) plus employer contributions of up to 25% of net self-employment compensation, total capped at $69,000. Has a Roth option. Best for high earners who want maximum contribution flexibility. Requires an annual Form 5500 when assets exceed $250,000.
- SIMPLE IRA: For self-employed with employees. Employee contribution limit $16,500 (2026).
A high-income freelancer earning $150,000 net could potentially contribute $69,000 to a Solo 401(k) — reducing taxable income by the same amount, saving approximately $15,000+ in federal income and SE taxes.
Health Insurance Deduction
Self-employed individuals who are not eligible for employer-sponsored health insurance (their own or a spouse's) can deduct 100% of health insurance premiums — medical, dental, and vision — as an above-the-line deduction. This deduction reduces AGI rather than being an itemised deduction, making it available even to those who take the standard deduction.
This applies to coverage for yourself, your spouse, and your dependants. The deduction cannot exceed net self-employment income for the year.
Self-Employment Taxes in the UK, India, and Canada
UK — Self Assessment and National Insurance: Self-employed UK individuals file a Self Assessment tax return annually. Income tax applies at the standard bands (20%, 40%, 45%). National Insurance contributions for self-employed: Class 2 NIC (flat rate £3.45/week if profits exceed £12,570) and Class 4 NIC (9% on profits between £12,570–£50,270; 2% above). Allowable business expenses reduce taxable profit similarly to the US. Self-employed individuals can contribute to a personal or stakeholder pension and claim tax relief. HMRC guidance at gov.uk/self-assessment.
India — ITR-3/4 and Presumptive Taxation: Self-employed individuals in India file ITR-3 (business income) or ITR-4 (Sugam, for presumptive taxation). The presumptive taxation scheme (Section 44AD) allows eligible businesses to declare 8% of turnover (6% for digital receipts) as income without detailed bookkeeping, simplifying compliance. Professional income (Section 44ADA) allows declaring 50% of gross receipts as income. All legitimate business expenses are deductible. Advance tax (equivalent to quarterly estimated payments) is required if tax liability exceeds ₹10,000. Details at incometaxindia.gov.in.
Canada — T2125 Business Income: Self-employed Canadians report business income on Form T2125 (Business and Professional Activities). Net income is subject to both federal and provincial income tax plus CPP contributions (both employee and employer portions — similar to US SE tax). Business expenses are deductible, including home office, vehicle, supplies, and professional fees. RRSP contributions are calculated on earned income including self-employment. Quarterly instalments are required when taxes owing exceed $3,000. CRA guide at canada.ca.