Self-Employment Tax Explained
When you work for an employer, your paycheck automatically has 7.65 percent withheld for Social Security and Medicare (FICA), and your employer matches another 7.65 percent behind the scenes. When you are self-employed, you are both the employee and the employer, so you pay the full 15.3 percent yourself. That is self-employment tax, and it catches most new freelancers by surprise.
The 15.3 percent breaks down into two pieces: 12.4 percent for Social Security on earnings up to the annual wage base ($168,600 for 2026) and 2.9 percent for Medicare on every dollar of self-employment earnings with no cap. High earners pay an additional 0.9 percent Medicare surtax on self-employment income above $200,000 single or $250,000 married filing jointly.
The 92.35 Percent Rule
Before you multiply your net profit by 15.3 percent, you first multiply it by 92.35 percent. This represents the employer-equivalent deduction the IRS grants self-employed workers so they are not taxed on the "employer share" that a W-2 worker never sees on their paycheck. In practice, the effective SE tax rate on your net profit is closer to 14.13 percent (0.9235 x 0.153), not a flat 15.3 percent.
Deductible Half of SE Tax
On top of the 92.35 percent adjustment, the IRS also lets you deduct the "employer half" of SE tax (roughly 7.65 percent of 92.35 percent of net profit) as an above-the-line deduction on Schedule 1. This reduces your adjusted gross income (AGI) and therefore your income tax bill, but it does not reduce SE tax itself. The deduction is automatic when you file Schedule SE alongside your 1040 and does not require itemizing.
Quarterly Estimated Payments
If you expect to owe more than $1,000 in federal tax for the year, the IRS requires you to make quarterly estimated tax payments using Form 1040-ES. The 2026 due dates are April 15, June 15, September 15, and January 15, 2027. Each payment should cover roughly one-fourth of your projected annual tax bill. Missing a quarter triggers an underpayment penalty calculated at the IRS short-term rate plus 3 percent, prorated over the days late.
Two safe harbor rules protect you from the underpayment penalty: pay at least 90 percent of the current year tax, or pay 100 percent of last year's tax (110 percent if your AGI exceeded $150,000). Most freelancers find it easier to simply set aside 25 to 35 percent of every payment received in a dedicated tax savings account and send in quarterly checks from there.
Common Freelancer Deductions
- Home office: A percentage of rent, utilities, and internet proportional to the square footage used exclusively for work. Alternatively, the simplified method at $5 per square foot (up to 300 sq ft) gives a maximum $1,500 deduction.
- Mileage: 67 cents per business mile driven in 2026 using the standard mileage rate, or actual vehicle expenses prorated by business use percentage.
- Health insurance premiums: Above-the-line deduction for self-employed individuals not eligible for an employer subsidized plan (yours or a spouse's).
- Retirement contributions: SEP-IRA, Solo 401(k), or SIMPLE IRA contributions reduce your taxable income substantially. Solo 401(k) allows up to $70,000 in 2026 for those under 50.
- Software and subscriptions: Accounting tools, design software, cloud storage, project management tools, stock photos, and website hosting.
- Education: Courses, books, and conferences directly related to maintaining or improving your current skills.
- Business meals: 50 percent of qualifying meals with clients or while traveling for business.
- Self-employment tax deduction: Half of your SE tax is automatically deductible on Schedule 1.
Schedule SE and Schedule C
Self-employed workers file two extra schedules with their 1040. Schedule C reports your gross business income and expenses, producing a net profit or loss. Schedule SE then takes that net profit, applies the 92.35 percent rule, and computes the actual SE tax. The SE tax flows onto line 23 of your 1040, and the deductible half flows onto Schedule 1 as an adjustment to income.
Setting Money Aside as You Go
A simple system: open a separate high-yield savings account labeled "Taxes." Every time a client pays you, transfer 25 to 30 percent of the payment into that account. When quarterly due dates arrive, pay directly from that account using the IRS Direct Pay system. This prevents the temptation to spend money that the IRS already owns and ensures you never face a surprise April tax bill.