Self-Employment Tax: Why Your First Freelance Year Costs More Than You Expect
Self-employment tax is 15.3% on top of income tax, and it catches almost everyone who leaves a salaried job. Here is exactly how it is calculated.
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The first freelance tax bill is where the arithmetic stops being abstract.
You knew about income tax. What you probably did not budget for is that self-employment tax arrives first, is charged at a flat rate, and does not care about your deductions in the way income tax does.
The short answer
Self-employment tax is 15.3% of 92.35% of your net profit: 12.4% for Social Security, on earnings up to $184,500 in 2026, plus 2.9% for Medicare with no cap. On $80,000 of profit it comes to $11,304, and half of that is deductible from your income.
Two taxes, not one
As an employee, your payslip showed Social Security and Medicare coming out at 7.65%. What it did not show was your employer quietly paying the other 7.65% on your behalf.
Self-employed, you are both parties. You pay both halves.
The IRS explains the mechanics in full, but the shape is simple: this is a flat tax on your business profit, and it applies before you get anywhere near the income tax brackets.
The 92.35% that trips people up
Self-employment tax is not charged on all your profit. It is charged on 92.35% of it.
That number is not arbitrary. An employer gets to deduct its half of payroll tax as a business expense. The 7.65% reduction puts a self-employed person in roughly the same position. So:
- Profit of $80,000
- × 92.35% = $73,880 in net earnings from self-employment
- × 15.3% = $11,304 in self-employment tax
Before a single dollar of income tax.
This is where 'set aside 20%' fails
Self-employment tax alone is over 14% of profit. Add federal income tax and a single filer on $80,000 of profit is already near 21%; once state income tax is included, most freelancers land between 25% and 30%. Anyone telling you to set aside a fifth of your income has not done this arithmetic.
Social Security stops. Medicare does not.
The two halves behave differently once you earn well.
Social Security applies only up to the wage base — $184,500 of earnings in 2026. Past that, the 12.4% stops entirely.
Medicare has no cap. The 2.9% applies to every dollar, forever. And above $200,000 (single) or $250,000 (married filing jointly), an extra 0.9% Additional Medicare Tax applies on the excess.
One consequence worth knowing: if you also have a W-2 job, those wages use up part of your Social Security cap first. Earn $150,000 on a salary and only $34,500 of the cap is left for your freelance profit.
Half of it comes back
Here is the part that softens the blow. One half of your self-employment tax is deductible against income tax, automatically, whether or not you itemise.
On that $80,000 example, roughly $5,652 comes off your income before the brackets are applied. It does not reduce the self-employment tax itself — it reduces the income tax charged on top.
One detail almost every article gets wrong: the Additional Medicare Tax is not part of the deductible half. It is an employee-side surtax, and the employer-equivalent deduction does not apply to it.
The $400 floor
If your net earnings from self-employment come to less than $400 for the year, no self-employment tax is due at all.
That is net earnings, not profit — so it is 92.35% of profit. A business that made $430 in profit generates $397 of net earnings and owes nothing.
It is a low bar. Almost any real freelance work clears it.
It buys something
Self-employment tax is not pure cost. It is how you accrue Social Security credits, and your eventual benefit is calculated from your 35 highest-earning years. Freelancers who aggressively minimise their reported earnings are also quietly reducing their own retirement benefit.
What to do about it
Three levers actually work, in rough order of effect:
- Deduct properly. Self-employment tax is charged on profit, so every legitimate business expense saves about 14 cents of it per dollar, on top of the income tax it saves. That makes deductions worth substantially more to a freelancer than to an employee.
- Retirement contributions. These reduce income tax but not self-employment tax — worth knowing so you do not over-expect.
- An S-corp election, once profit is high enough. This is the only way to move income out of self-employment tax entirely, and it comes with real costs and real risks.
Run your own numbers before assuming any of them apply to you.