Self-Employment Tax Explained: The 15.3% Nobody Warned You About
The moment I truly understood freelance taxes was when I realized I owed two separate taxes. I’d been budgeting for income tax — looked at the brackets, figured out my rate, felt prepared. Then I discovered self-employment tax. An additional 15.3% on top of my income tax. That’s when the $8K shortfall suddenly made sense.
If you’re new to freelancing, this is probably the most important tax concept you need to understand. And it’s the one most people learn about too late.
What Is Self-Employment Tax?
Self-employment tax is your contribution to Social Security and Medicare. That’s it. It’s not a penalty for being self-employed. It’s not extra income tax. It’s the exact same Social Security and Medicare taxes that every worker in America pays.
The difference? Employees split it with their employer. Freelancers pay both halves.
When you’re an employee:
- You pay 7.65% (6.2% Social Security + 1.45% Medicare)
- Your employer pays 7.65% (same split)
- Total: 15.3%, but you only see half on your paycheck
When you’re a freelancer:
- You pay 15.3% (the full 12.4% Social Security + 2.9% Medicare)
- Nobody else chips in
- You see and feel every cent of it
This is why freelance tax bills are so much higher than employees expect. It’s not that the tax rate is higher — it’s that you’re paying a portion that was previously invisible to you.
How to Calculate It
The IRS applies self-employment tax to 92.35% of your net self-employment earnings (not gross income). The 7.65% reduction is meant to simulate the fact that employees don’t pay FICA on the employer’s contribution.
The formula:
- Calculate net self-employment income (gross income - business deductions = Schedule C net profit)
- Multiply by 92.35%
- Apply the tax rates:
- 12.4% for Social Security (on first $168,600 in 2026)
- 2.9% for Medicare (on all earnings, no cap)
- 0.9% Additional Medicare Tax (on earnings above $200K single)
Example on $80,000 net SE income:
Step 1: $80,000 × 0.9235 = $73,880 (taxable base) Step 2: Social Security: $73,880 × 0.124 = $9,161 Step 3: Medicare: $73,880 × 0.029 = $2,143 Step 4: Total SE tax: $9,161 + $2,143 = $11,304
That’s $11,304 just for Social Security and Medicare. Before any income tax.
Quick Reference Table
| Net SE Income | SE Tax (approx) | Monthly Impact |
|---|---|---|
| $30,000 | $4,238 | $353/month |
| $50,000 | $7,065 | $589/month |
| $75,000 | $10,597 | $883/month |
| $100,000 | $14,130 | $1,178/month |
| $125,000 | $17,662 | $1,472/month |
| $150,000 | $21,195 | $1,766/month |
The Silver Lining: The SE Tax Deduction
You can deduct half of your self-employment tax from your adjusted gross income. This is an above-the-line deduction, meaning you get it even if you don’t itemize.
On $11,304 of SE tax, you deduct $5,652 from your AGI. At a 22% income tax bracket, that saves you $1,243 in income tax. Not nothing.
This deduction exists because employees don’t pay income tax on their employer’s FICA contribution. The deduction makes the playing field slightly more level for self-employed people.
Strategies to Reduce Self-Employment Tax
Strategy 1: Maximize Business Deductions
Every dollar of business deductions reduces your net SE income, which reduces SE tax. A $1,000 deduction saves you about $141 in SE tax (plus income tax savings on top).
Common deductions people miss:
- Home office (simplified: up to $1,500/year)
- Health insurance premiums (entire amount if self-employed)
- Half of SE tax itself (above-the-line deduction for income tax purposes)
- Retirement contributions (SEP IRA, Solo 401k)
- Mileage ($0.70/mile in 2026)
- Professional development
- Business portion of phone and internet
Strategy 2: S-Corp Election (The Big One)
Once your net SE income consistently exceeds $80K, S-Corp election is the most impactful tax strategy for freelancers.
How it works: As a sole proprietor, you pay 15.3% SE tax on ALL net income. As an S-Corp, you pay yourself a “reasonable salary” and take the remainder as distributions. SE tax only applies to the salary, not the distributions.
Example on $120,000 net income:
| Sole Proprietor | S-Corp (salary $70K) | |
|---|---|---|
| SE tax base | $120,000 | $70,000 |
| SE tax (approx) | $16,956 | $10,710 |
| SE tax savings | — | $6,246/year |
The costs of S-Corp:
- Payroll service: $30-50/month ($360-600/year)
- Additional tax filing (Form 1120S): $500-1,000 extra from your CPA
- State S-Corp fees: varies ($0-$800/year depending on state)
- Total additional cost: ~$1,000-2,000/year
Net savings: $4,000-5,000/year at $120K income. The savings increase as income increases.
The “reasonable salary” rule: The IRS requires your S-Corp salary to be “reasonable” for your industry and role. Paying yourself $20K on $120K income won’t fly. Most CPAs recommend 50-60% of net income as salary. Your CPA should determine the specific number.
Strategy 3: Retirement Contributions (Indirect Reduction)
SEP IRA and Solo 401(k) contributions reduce your income tax but NOT your self-employment tax (they’re deducted after SE tax is calculated). However, they reduce your overall tax bill and build retirement savings.
Solo 401(k) is particularly interesting for S-Corp owners because the employee contribution ($23,000 in 2026) reduces your W-2 income and therefore your FICA taxes.
Strategy 4: Hire Your Spouse
If your spouse works in your business (legitimately — bookkeeping, admin, client support), paying them a salary moves income from SE tax to regular employment. You pay employer FICA (7.65%) instead of full SE tax (15.3%) on that amount. The savings depends on how much you pay them and whether it pushes your remaining income into lower brackets.
This only works if your spouse actually performs legitimate work. The IRS will scrutinize this if it looks like a tax avoidance scheme.
Common Mistakes
Mistake 1: Not budgeting for SE tax separately from income tax. New freelancers look at income tax brackets (10%, 12%, 22%) and budget accordingly. Then they discover an additional 15.3% SE tax. Budget for both from day one.
Mistake 2: Thinking S-Corp eliminates SE tax. S-Corp reduces SE tax; it doesn’t eliminate it. You still pay FICA on your salary. The savings come from exempt distributions, not from avoiding all payroll taxes.
Mistake 3: Setting S-Corp salary too low. The IRS has flagged S-Corp owners paying themselves unreasonably low salaries. If similar employees in your field earn $70K and you’re paying yourself $30K while taking $90K in distributions, expect scrutiny.
Mistake 4: Ignoring the Social Security benefit. SE tax isn’t just a cost — it funds your Social Security benefits. Your future Social Security payments are based on your earnings history. Aggressively minimizing SE tax also minimizes your future benefits. Balance tax savings against retirement security.
When to Worry About SE Tax
Year 1-2: Just budget for it. Save 25-30% of gross income. Don’t overthink optimization.
Year 3+, under $80K: Continue saving and focus on maximizing deductions. S-Corp isn’t worth the complexity yet.
Year 3+, over $80K: Talk to your CPA about S-Corp election. The savings are significant and recurring.
Over $150K: S-Corp is almost certainly beneficial. Also explore Solo 401(k) for additional tax reduction.
The Bottom Line
Self-employment tax is the cost of being your own employer. It’s not unfair — employees pay the same total amount, they just don’t see their employer’s half. As a freelancer, you see all of it, and that visibility makes it feel worse than it is.
Budget for it (25-30% savings rate covers both SE and income tax), take advantage of the half-SE-tax deduction, maximize your business deductions, and consider S-Corp election when your income justifies it.
The 15.3% stings. But it’s also building your Social Security and Medicare benefits for retirement. Small consolation when you’re writing a $3,600 quarterly check, I know. But at least the money isn’t disappearing — it’s going into a system you’ll eventually benefit from.