Educational information, not individual financial advice.
Key Takeaways
If you're a W-2 employee, your employer pays half of your FICA (Social Security + Medicare) and you pay the other half — both halves total 15.3%. As a self-employed person, you pay both halves yourself. This is the self-employment tax, and it's the tax most likely to surprise first-year freelancers and consultants.
SE tax = 15.3% × (net SE earnings × 92.35%)
The 92.35% factor exists because the IRS first deducts the employer-half before computing the tax (otherwise you'd pay tax on tax). The math:
The 15.3% breaks into two pieces:
Above the SS wage base, the SS portion stops accruing. Only the Medicare portion (2.9%, plus 0.9% above the additional-Medicare threshold) keeps applying. So the marginal SE tax rate drops from ~14.13% (after the half-deduction) to ~2.7% above the cap.
You can deduct half of your SE tax as an above-the-line adjustment to AGI. This recovers the "employer half" you paid, but only at your marginal income tax rate — not at the 15.3% you paid in.
Worked example, $100,000 net SE earnings, single filer, 24% marginal:
The "effective" SE rate is always lower than the headline 15.3%, but always higher than what a W-2 employee feels (since the employee never sees the employer half).
Self-employed taxpayers can deduct annual health insurance premiums (self + spouse + dependents) above the line, capped at the net SE earnings of the business. This is huge:
Catch: if you or your spouse is eligible for an employer-sponsored plan (even one you're not enrolled in), § 162(l) is disallowed. The deduction is for self-employed people who genuinely don't have employer coverage available.
Because SE income has no employer withholding, you owe quarterly estimated taxes. The safe harbor is the lesser of:
Pay quarterly via Form 1040-ES on April 15, June 15, September 15, and January 15. Underpayment penalties accrue if you fall short, computed as a daily interest rate on the unpaid balance.
If you're consistently earning $50k+ of net SE income, an S-corp election can save SE tax. The mechanism:
Trade-off: payroll tax + state unemployment + 941 filings + W-2 + reasonable-salary IRS scrutiny. The break-even is usually around $40-50k of net SE income; below that, the compliance cost exceeds the savings.
The S-corp election also eliminates the "half SE deduction" since you no longer have SE income. But the savings on the distribution portion typically outweigh that.
A Solo 401(k) lets a self-employed person contribute as both employee (up to the standard 401(k) limit) and employer (up to 25% of net SE earnings, with the half-SE-tax deduction adjustment baked in). Combined limit is the § 415(c) cap ($72,000 in 2026, more with catch-ups).
Contributions reduce AGI, which lowers income tax — but they don't reduce SE tax. SE tax is computed before retirement contributions, so a Solo 401(k) saves income tax but not SE tax.
The /taxes page federal-breakdown line "Self-employment tax" reflects 15.3% × 92.35% × your net SE earnings (with the SS wage base capping the SS portion). The half-SE-tax deduction is automatically applied to AGI; you'll see the adjusted AGI in the breakdown.
If you've got SE income, also check the QBI deduction line — the QBI 20% on top of the half-SE-tax deduction is the meaningful tax break that makes SE work financially comparable to W-2.
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Educational information distilled from the Horizons engine methodology — not individual financial advice.
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