Employees usually see Social Security and Medicare taxes withheld from each paycheck. When you work for yourself, there is no separate employer withholding those taxes for you. Instead, the Social Security and Medicare portion is generally calculated as self-employment tax on Schedule SE and reported with your individual income tax return.
What is self-employment tax?
The federal self-employment tax rate is 15.3%. That is made up of:
- 12.4% Social Security tax
- 2.9% Medicare tax
The IRS generally calculates self-employment tax on 92.35% of net self-employment earnings, rather than simply applying 15.3% to gross business revenue. Your business expenses and the specific Schedule SE calculation matter.
How much of your income is subject to Social Security tax in 2026?
For 2026, the Social Security contribution and benefit base is $184,500. The 12.4% Social Security portion applies only up to the applicable annual limit when your Social Security wages and self-employment earnings are combined.
The regular 2.9% Medicare portion does not have the same annual wage cap. Higher-income taxpayers can also be subject to a separate 0.9% Additional Medicare Tax once combined Medicare wages and self-employment income exceed the applicable filing-status threshold.
What if you also have a W-2 job?
If you have both wages from an employer and self-employment income, the Social Security wage base is coordinated across both sources. W-2 wages subject to Social Security tax use part—or potentially all—of the annual Social Security limit before the Social Security portion of self-employment tax is calculated on your business income.
That does not mean your self-employment income is automatically free from all employment-related taxes. Medicare rules still apply, and your full tax picture must be considered.
Can you deduct part of self-employment tax?
Yes. The IRS allows a deduction for the employer-equivalent portion of self-employment tax when calculating adjusted gross income. This deduction can reduce income subject to income tax, but it does not erase the self-employment tax itself.
When do self-employed people actually pay the tax?
Because taxes usually are not automatically withheld from self-employment income, many business owners need to make estimated tax payments during the year. Individuals generally may need estimated payments when they expect to owe at least $1,000 when the return is filed, although the exact requirement depends on the taxpayer’s facts and prior-year tax.
Estimated payments can include both expected income tax and expected self-employment tax. This is one reason tax planning during the year can be more useful than waiting until the tax return is prepared.
Does forming an LLC change Social Security tax?
Not by itself. A single-member LLC taxed as a sole proprietorship generally does not eliminate self-employment tax simply because the business has an LLC legal structure. The federal tax classification of the business is what matters for this calculation.
What about an S corporation?
An S corporation can change how employment taxes apply, but it does not mean an owner can simply stop paying Social Security and Medicare taxes. If a shareholder works in the business, the IRS generally requires the shareholder-employee to receive reasonable compensation through payroll before taking non-wage distributions. Those wages are subject to employment taxes.
Remaining eligible S corporation profit may receive different employment-tax treatment than wages, which is why an S corporation election can be worth evaluating for some profitable businesses. But payroll costs, reasonable compensation, state taxes, bookkeeping, retirement planning, and compliance costs should all be considered before making the election.
Common mistakes self-employed business owners make
- Saving only for income tax and forgetting self-employment tax.
- Using gross revenue instead of net profit when estimating taxes.
- Assuming an LLC automatically changes self-employment tax.
- Electing S corporation status without analyzing reasonable compensation and added compliance costs.
- Waiting until tax season to calculate a large balance due instead of reviewing estimated payments during the year.
Frequently asked questions
Do self-employed people pay into Social Security?
Yes. Self-employed individuals generally pay Social Security and Medicare taxes through self-employment tax calculated on Schedule SE.
What is the Social Security wage base for 2026?
The Social Security contribution and benefit base for 2026 is $184,500. The annual limit applies to the Social Security portion when applicable wages and self-employment earnings are combined.
What if I have both W-2 wages and self-employment income?
Your wages and self-employment earnings are coordinated for the Social Security wage base. Wages can reduce the amount of self-employment earnings subject to the 12.4% Social Security portion.
Does an S corporation eliminate Social Security and Medicare taxes?
No. A shareholder-employee who performs services generally must be paid reasonable compensation through payroll, and those wages remain subject to employment taxes.
Official resources
- IRS: Self-employment tax — Social Security and Medicare taxes
- Social Security Administration: Contribution and Benefit Base
- IRS: Estimated taxes
- IRS: S corporation reasonable compensation
This article provides general educational information and is not individualized tax, legal, financial, or investment advice. Tax treatment depends on your specific facts and circumstances and may change as laws and guidance change.