Self-Employed? The Self-Employment Tax Explained Without Fear

The first year of app deliveries, María filed as always: she added up what she earned, subtracted what she thought corresponded, and waited for her refund. Instead of a refund came a bill: she owed more than a thousand dollars. Nobody had explained to her that working for yourself comes with an extra tax that employees never see.

If you’re a contractor, an app delivery driver, or have your own business, this article explains that tax nobody mentioned and, above all, how to live with it without scares.

What the self-employment tax is (and why it exists)

When you’re an employee, your employer pays half of the payroll taxes: Social Security and Medicare. The other half comes out of your paycheck. When you work for yourself, there’s no employer putting in their half, so you pay both: yours and the one the employer would have paid.

That’s the self-employment tax. It’s not a punishment for being independent: it’s the same Social Security and Medicare everyone pays, only consolidated into one person. The difference is that, instead of coming out of each paycheck, you’re responsible for calculating and paying it.

The rate: 15.3%, in parts

The combined self-employment tax rate is 15.3%, made up of:

• 12.4% for Social Security (OASDI)
• 2.9% for Medicare

But here’s the detail that simplifies everything: it doesn’t apply to your full gross earnings, but to 92.35% of your net earnings. It’s the recognition that, if you were an employee, your employer would pay half the tax on a slightly smaller base. In practice: you take your net earnings (what you earned minus your business expenses), multiply by 92.35%, and on that you apply 15.3%.

Two more details that complete the picture:

• The Social Security part (12.4%) only applies up to an annual earnings cap: for 2026 that cap is $184,500 (Social Security’s wage base, confirmed by the SSA). Above that amount, the 12.4% no longer applies; Medicare does, with no limit.
• If your income is high, there’s an additional Medicare of 0.9% on earnings above $200,000 ($250,000 if filing jointly).

An example with real numbers

Say you earned $40,000 net from your self-employment during the year (after subtracting your business expenses, gas, materials, phone, whatever):

• Tax base: $40,000 × 92.35% = $36,940.
• Self-employment tax: $36,940 × 15.3% = $5,652.

Those $5,652 are added to your normal income tax. That’s why the first year surprises so much: it’s not just the usual tax, it’s a whole second layer. And here’s the good news: half of that tax ($2,826 in this example) is deductible from your income on your return; an “above the line” adjustment that reduces your income tax.

When it applies (and the $400 threshold)

The self-employment tax applies when your net earnings from self-employment are $400 or more in the year. Four hundred dollars: practically any regular self-employment activity exceeds that threshold. If you did a small occasional job below that, it doesn’t apply; if you work by app regularly, it applies from the first dollar.

The tax is calculated on Schedule SE of your return, which accompanies Form 1040. And it’s paid during the year through quarterly estimated payments, not in one hit in April —which is exactly the topic of our estimated payments guide.

How to live with it: three habits

1. Set aside 25–30% of every payment you receive. It’s not an exact science, but it’s the rule experienced contractors use: one part covers self-employment, another the income tax, and what’s left is truly yours. If the money “disappears” from your account as soon as it arrives, you’ll never miss it in April.
2. Keep records of your business expenses. Every legitimate expense reduces your net earnings, and every dollar less in net earnings reduces the self-employment tax. Gas, materials, phone, insurance, accounting: if it’s a business expense, it’s recorded. No records, no deductions.
3. Pay estimated each quarter. The IRS expects its money during the year, not only in April. If you expect to owe $1,000 or more, quarterly payments avoid the underpayment penalty and turn the April hit into a formality.

What to do today, in order

1. If you work for yourself, identify your net earnings for the year so far (income minus expenses).
2. Estimate your self-employment tax with the formula: net earnings × 92.35% × 15.3%.
3. Open a separate account or envelope and start setting aside a percentage of each payment.
4. Check our quarterly estimated payments guide to pay on time and avoid penalties.

Official sources

• IRS – Self-employed individuals tax center
• SSA – Maximum taxable earnings

This content is informational and is not tax advice. For your particular case, consult the official sources or an authorized professional.