If you work for yourself, you may be responsible for more than federal income tax. Self-employed business owners generally pay self-employment tax, which helps fund Social Security and Medicare.
Understanding how self-employment tax is calculated can help you estimate what you may owe, avoid tax-time surprises, and decide whether your current business structure still makes sense as your income grows.
What is self-employment tax?
Self-employment tax is the Social Security and Medicare tax generally paid by people who work for themselves. When you are an employee, you normally pay part of those taxes through payroll withholding and your employer pays a matching portion. When you are self-employed, there is no separate employer making that contribution for you.
The standard federal self-employment tax rate is 15.3%:
- 12.4% Social Security tax
- 2.9% Medicare tax
Self-employment tax is calculated on Schedule SE and reported with your individual federal income tax return.
How is self-employment tax calculated?
This is one of the most common areas of confusion for business owners. Self-employment tax is generally not calculated on gross business revenue. You first determine your net business profit after allowable business expenses. Under the regular Schedule SE calculation, you generally multiply net self-employment earnings by 92.35% before applying the Social Security and Medicare tax rates.
Example: $100,000 of net business profit
Assume your Schedule C business has $150,000 of revenue and $50,000 of deductible business expenses, leaving $100,000 of net profit.
- $100,000 net profit × 92.35% = $92,350 of net earnings from self-employment
- $92,350 × 15.3% = approximately $14,130 of self-employment tax, assuming you have no W-2 wages and remain below the Social Security wage base
That estimated self-employment tax is in addition to any federal income tax you may owe. This is why a business owner can have a profitable year and still be surprised by the total tax bill.
Do self-employed people pay into Social Security?
Yes. Self-employed individuals generally pay into Social Security through the 12.4% Social Security portion of self-employment tax. Your reported self-employment earnings can count toward your Social Security coverage and future benefits.
So self-employment tax is not simply an extra business tax. A portion funds Social Security, while another portion funds Medicare.
What is the Social Security wage base for self-employed people in 2026?
For 2026, the Social Security contribution and benefit base is $184,500. The 12.4% Social Security portion generally applies only up to the applicable annual limit when your wages and net self-employment earnings are considered together.
Medicare works differently. The regular 2.9% Medicare tax does not have the same annual earnings cap. Higher-income taxpayers may also owe the separate 0.9% Additional Medicare Tax when applicable wages, compensation, and self-employment income exceed the threshold for their filing status.
What if you have a W-2 job and self-employment income?
If you earn wages from an employer and also have self-employment income, your W-2 wages can affect the Social Security portion of your self-employment tax. Wages subject to Social Security tax use part—or potentially all—of the annual Social Security wage base first.
If your W-2 wages have already reached the Social Security limit, additional self-employment earnings generally would not be subject to another 12.4% Social Security tax. However, Medicare tax can still apply.
This is one reason business owners with both W-2 wages and self-employment income should look at the entire tax picture instead of estimating tax based only on the business.
How do self-employed people pay Social Security and Medicare taxes?
You generally do not send a separate Social Security payment to the Social Security Administration. Your self-employment tax is calculated on Schedule SE and paid to the IRS as part of your federal tax obligation.
Because self-employed income normally does not have taxes automatically withheld, many business owners make quarterly estimated tax payments during the year. Those payments may cover both:
- Federal income tax
- Self-employment tax
Individuals, including sole proprietors and partners, generally may need estimated tax payments if they expect to owe at least $1,000 when the return is filed, subject to the estimated-tax rules and safe-harbor provisions.
If you also receive W-2 wages, increasing withholding from your paycheck can sometimes be part of the planning strategy instead of relying entirely on separate estimated payments.
If your self-employment income has increased, your estimated payments no longer match what the business is earning, or you are juggling both W-2 and business income, tax planning can help you see the full picture before filing season.
Is self-employment tax separate from federal income tax?
Yes. Federal income tax and self-employment tax are two different taxes. Your business profit can potentially create federal income tax liability while also generating Social Security and Medicare tax through self-employment tax.
Your total tax picture may also include state taxes, estimated-payment requirements, deductions, credits, retirement contributions, and other items depending on your circumstances.
Can you deduct part of self-employment tax?
Generally, yes. The tax rules allow a deduction for the employer-equivalent portion of self-employment tax when calculating adjusted gross income.
This deduction can reduce income subject to federal income tax, but it does not eliminate the self-employment tax itself. Using the $100,000 net-profit example above, a self-employment tax of roughly $14,130 would generally produce an adjustment to income of roughly half that amount, subject to the actual Schedule SE calculation.
Does an LLC pay Social Security tax?
Simply forming an LLC does not automatically reduce or eliminate self-employment tax. A single-member LLC that has not elected a different federal tax treatment is generally disregarded for federal income-tax purposes, so the owner's business activity is commonly reported on Schedule C and applicable net earnings may still be subject to self-employment tax.
The better question is not just, “Do I have an LLC?” It is “How is my LLC taxed for federal tax purposes?”
This distinction matters because an LLC can potentially be taxed in different ways depending on its ownership and tax elections.
Can an S corporation reduce self-employment tax?
An S corporation can change how employment taxes apply to business income, which is why the election can be valuable for some profitable business owners. But it does not mean an owner can simply stop paying Social Security and Medicare taxes.
If an S corporation shareholder performs services for 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.
Eligible profit remaining after reasonable compensation may receive different employment-tax treatment than Schedule C profit. That can create planning opportunities, but an S corporation also brings payroll, tax-filing, bookkeeping, reasonable-compensation, retirement-plan, state-tax, and administrative considerations.
If you are considering an election, read When Should an LLC Elect S Corporation Status? and review the decision with a tax professional before making the change.
Do you still pay self-employment tax if you are receiving Social Security?
Potentially, yes. Self-employment-tax rules can still apply even if you are already receiving Social Security or Medicare benefits. Continuing to earn self-employment income can therefore still create Social Security and Medicare tax obligations.
Where does self-employment tax go?
Self-employment tax primarily funds Social Security and Medicare, similar to payroll taxes withheld from employees' wages. Reported self-employment earnings can also affect your Social Security earnings record and future benefits.
Common self-employment tax mistakes
- Estimating tax from gross revenue instead of net business profit.
- Saving only for federal income tax and forgetting self-employment tax.
- Assuming an LLC automatically reduces Social Security or Medicare tax.
- Forgetting that Medicare tax can continue after the Social Security wage base is reached.
- Failing to adjust estimated payments as business income changes during the year.
- Electing S corporation status without analyzing reasonable compensation and the added compliance costs.
- Waiting until tax season to start tax planning.
Frequently asked questions
How is self-employment tax calculated?
Under the regular method, you generally determine net business profit, calculate net earnings from self-employment using the Schedule SE rules, and then apply the applicable Social Security and Medicare tax rates. The standard combined rate is 15.3%, subject to the Social Security wage limitation and other applicable rules.
Do self-employed people pay into Social Security?
Yes. Self-employed individuals generally pay Social Security tax through the Social Security portion of self-employment tax.
How do I pay Social Security tax if I am self-employed?
You generally calculate self-employment tax on Schedule SE and pay it to the IRS. Many self-employed taxpayers make quarterly estimated payments during the year to cover both income tax and self-employment tax.
What is the self-employment tax rate for 2026?
The standard combined rate is generally 15.3%: 12.4% for Social Security and 2.9% for Medicare. The 2026 Social Security contribution and benefit base is $184,500.
Is self-employment tax in addition to federal income tax?
Yes. Self-employment tax covers Social Security and Medicare. Federal income tax is calculated separately.
Does an LLC avoid self-employment tax?
Not simply because the business is an LLC. Federal tax classification and the nature of the owner's income determine how self-employment or payroll taxes apply.
Does an S corporation eliminate Social Security tax?
No. A shareholder who works for the S corporation generally must receive reasonable compensation, and those wages remain subject to employment taxes.
Tax planning matters more as your business grows
As your business becomes more profitable, the interaction between income tax, self-employment tax, estimated payments, entity structure, retirement contributions, and owner compensation can become increasingly important.
The goal should not be to “avoid Social Security tax.” The goal is to make sure your business is structured correctly, you are paying what is legally required, and you are not missing legitimate tax-planning opportunities.
If your income has increased, you are considering an S corporation election, or you consistently owe more than expected at tax time, review your strategy before the year is over.
If your income has increased, you are considering an S corporation, or you are consistently owing more than expected, this is the time to review your strategy—not after the year is over.
We can look at your income, entity structure, estimated payments, owner compensation, and other planning opportunities based on your actual numbers.
Official resources
- IRS: Self-employment tax — Social Security and Medicare taxes
- IRS Topic No. 554: Self-employment tax
- 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.