Self-employment tax blindsides most first-year sole props. It's not the income tax. It's the 15.3% sitting on top of it, the part W-2 employees never see because their employer quietly pays half.
Here's exactly how the IRS computes it. We pulled the formulas from Publication 334 and Schedule SE; you can replicate them in a spreadsheet.
The 15.3% rate, broken down
Self-employment tax is two pieces:
- 12.4% Social Security: applied to net SE earnings up to the annual wage base ($168,600 in 2024; $176,100 in 2025; $182,400 projected for 2026, confirm the year before filing)
- 2.9% Medicare: applied to all net SE earnings, no cap
- +0.9% additional Medicare: applied to net SE earnings above $200K single / $250K MFJ
W-2 employees pay half (7.65%). Their employer pays the other half. As a sole prop, you pay both.
The 92.35% adjustment (the part everyone forgets)
You don't pay SE tax on 100% of your net Schedule C profit. You pay it on 92.35% of it.
Why? W-2 employees don't pay FICA on the employer's share of FICA, and Congress wanted symmetry. Multiplying by 92.35% (which is 1 − 7.65%) gets the tax base in line with what an equivalent W-2 worker would face.
So the formula:
Net SE earnings = Schedule C line 31 × 0.9235
SE tax = (Net SE earnings × 0.124, capped at the SS wage base)
+ (Net SE earnings × 0.029)
+ (Net SE earnings above $200K/$250K × 0.009)
If your Schedule C profit is below $400, you owe no SE tax. (You may still owe income tax.)
A worked example
Sole prop, single, $80,000 of net Schedule C profit, 2025:
Step 1: 80,000 × 0.9235 = 73,880 (net SE earnings)
Step 2: 73,880 × 0.124 = 9,161 (SS portion, under the cap)
Step 3: 73,880 × 0.029 = 2,143 (Medicare portion)
Step 4: Additional Medicare = 0 (under $200K)
Step 5: Total SE tax = 11,304
SE tax: $11,304. Then income tax sits on top.
The half-deduction (the part most preparers miss for first-timers)
Half of your SE tax ($5,652 in the example above) is deductible as an above-the-line adjustment on Schedule 1, line 15. This reduces your AGI, which then reduces your income tax.
It's not on Schedule C. It's not on Schedule SE. It's a separate line on Schedule 1, and you only get it if you remember to take it.
The adjustment matters: at a 22% marginal income tax rate, the $5,652 deduction saves another $1,243 in income tax.
Where it appears on your return
| Form | Line | What goes there |
|---|---|---|
| Schedule SE Part I | line 6 | Net SE earnings (after 92.35%) |
| Schedule SE Part I | line 12 | Total SE tax |
| Form 1040 | Schedule 2, line 4 | SE tax (added to total tax) |
| Schedule 1 | line 15 | Half of SE tax (deduction) |
If your tax software is wired correctly, all four lines populate automatically once you enter the Schedule C number. If you're hand-filing, watch for these four. They're the most-skipped lines on any self-employed return.
What if I have multiple businesses?
Each Schedule C is computed separately. SE tax is computed on the combined net SE earnings across all of them. If one business shows a loss, it offsets the others.
What if I have W-2 wages too?
The Social Security cap applies to the combined wages and SE earnings. Your W-2 employer withheld FICA on your wages already; you don't get to apply the SS portion of SE tax to wages they already paid on.
The Schedule SE worksheet handles this (lines 8a–8d). Skip it and you'll overpay.
What if I'm a church employee or have farm income?
Different rules. Schedule SE Part II covers ministers, religious-order members, statutory employees, and farm income. We don't cover those edge cases here; see Pub 517 (clergy) or Pub 225 (farmers).
The S-corp question
If your Schedule C profit is consistently above ~$60,000 and stable, an S-corp election can reduce SE tax. The S-corp pays you a "reasonable" W-2 wage (FICA applies to that), and the rest flows through as distributions (no FICA). See S-corp election worth it? for the break-even math.
How ExpenseGhost helps
ExpenseGhost computes a running estimate of SE tax + income tax against your live transaction data, so the bill at year-end is never a surprise. The estimate updates as you classify expenses. See the tax dashboard. For the quarterly cadence the estimate feeds into, see quarterly estimated taxes for freelancers and Schedule C deductions checklist 2026.
FAQ
Do I owe SE tax if I had a loss?
No. SE tax only applies if net SE earnings are $400 or more. A loss carries no SE tax (and you may be able to deduct it against other income, depending on basis and at-risk rules).
Does SE tax fund my Social Security?
Yes. Both halves of the 12.4% credit toward your future Social Security benefit. Same with the 2.9% Medicare portion.
Can I take the QBI deduction on my SE income?
QBI (the §199A 20% deduction) is computed separately and reduces your income tax, not SE tax. SE tax is computed on Schedule C profit before QBI.
What if my income is over the additional Medicare threshold?
Net SE earnings above $200K (single) / $250K (MFJ) face an extra 0.9%. It's reported on Form 8959. The threshold is not indexed to inflation, so more sole props hit it every year.
ExpenseGhost provides tax estimates and tax-ready exports. We are not a tax preparer and do not file returns. Estimates are informational — verify every number with a licensed tax professional before filing.