Self-Employment Tax: What It Is and How to Reduce It
The 15.3% tax most new freelancers don't see coming — explained plainly.
By Reba Donaldson · Last reviewed: April 2026
What is self-employment tax?
Self-employment tax is the Social Security and Medicare tax paid by people who work for themselves. When you're an employee, your employer pays half of these taxes (7.65%) and withholds the other half from your paycheck. When you're self-employed, you pay both halves — the full 15.3%.
The breakdown: 12.4% goes to Social Security (on the first $176,100 of net self-employment income in 2026) and 2.9% goes to Medicare (on all net self-employment income, with no cap).
This is separate from income tax. Self-employment tax is calculated on Schedule SE and added on top of whatever income tax you owe. Many new freelancers are blindsided by it because they only planned for income tax.
How it's calculated
Self-employment tax is calculated on your net self-employment income — meaning your revenue minus your business expenses. But there's a small built-in adjustment: you calculate SE tax on 92.35% of net earnings, not 100%. This approximates the employer portion that a W-2 employee's employer would otherwise pay.
Example: If your net self-employment income is $80,000:
$73,880 × 15.3% = $11,304 self-employment tax
The deduction that softens the blow
The IRS allows you to deduct half of your self-employment tax from your gross income when calculating your income tax. This is an above-the-line deduction — you don't need to itemize to claim it.
In the example above: $11,304 ÷ 2 = $5,652 deduction from gross income. This reduces the income tax you owe, partially offsetting the SE tax burden.
How to reduce self-employment tax legally
1. Deduct all legitimate business expenses
SE tax is calculated on net profit, not gross revenue. Every legitimate business expense — software, equipment, home office, health insurance, professional development, mileage — reduces the base on which SE tax is calculated. Meticulous expense tracking is the single most effective SE tax reduction strategy.
2. Contribute to a retirement account
Contributions to a SEP-IRA, Solo 401(k), or SIMPLE IRA reduce your adjusted gross income and therefore your income tax — but they do not reduce SE tax. Still worth doing for the income tax savings and long-term benefit.
3. Elect S-corporation status (higher income levels)
If your net self-employment income consistently exceeds $60,000–$80,000 per year, electing S-corp status for your LLC can reduce SE tax significantly. As an S-corp owner, you pay yourself a "reasonable salary" (subject to payroll taxes) and take the remainder as distributions (not subject to SE tax). The setup and ongoing compliance costs make this worthwhile only at higher income levels — consult a CPA before pursuing this.
SE tax and estimated taxes
Self-employment tax must be included in your quarterly estimated tax payments. Many freelancers only think about income tax when estimating their quarterly payments and are surprised by the SE tax bill at filing time. Our estimated tax calculator accounts for both income tax and the SE tax component automatically.