Self-employment tax surprises people because nothing was withheld along the way. A W-2 employee never sees the employer's share of Social Security and Medicare, and never has to send anything in. A side hustle is the opposite: the money arrives whole, and the whole bill comes due later, on top of income tax.
The arithmetic is short. Net earnings, times 92.35%, times 15.3%. What follows is where each of those numbers comes from, what the caps do to them, and the one deduction the IRS allows against the total.
What the Tax Is Made Of
Two taxes wearing one name. The IRS topic on self-employment tax states the rate and the split: the law sets the self-employment tax rate as a percentage of your net earnings from self-employment, and that rate consists of 12.4% for Social Security and 2.9% for Medicare.
The self-employed tax centre describes the tax as similar to the Social Security and Medicare taxes withheld from the pay of most wage earners, and it is the reason you file Schedule SE at all. The difference is structural rather than mathematical: nothing is withheld, so you compute the figure once a year and pay it in quarterly instalments during the next one.
The Calculation, With the Numbers
Three steps, and the middle one is the one people skip:
- Net earnings. Gross business income minus ordinary and necessary business expenses, as the IRS defines it in the same topic.
- 92.35% of that figure. The amount subject to self-employment tax is generally 92.35% of net earnings, not the whole of it.
- 15.3% of the result. 12.4% plus 2.9%.
On $60,000 of net earnings, the arithmetic runs: 92.35% of $60,000 is $55,410, and 15.3% of $55,410 is $8,477.73. The 7.65% that the first step removes is the employer-equivalent share, and its existence is why the next section's deduction exists too.
The Cap That Applies to Half the Tax
Only the Social Security portion has a ceiling, and the ceiling moves every year. The IRS topic on withholding rates states it for this year: for earnings in 2026, the Social Security wage base limit is $184,500, and there is no wage base limit for Medicare tax, so every dollar of net earnings above that line still pays the 2.9%.
For a side hustle earning $30,000 on top of a salary, the unusual case is worth knowing about: the cap applies to the combined total, so if the salary already reaches $184,500, the Social Security portion of the side hustle's tax is not owed again on the same dollars. Working that out is why Schedule SE asks for "Total social security wages and tips" on line 8a before it multiplies anything, so the cap is applied to the combined figure rather than to the side hustle alone.
The $400 Threshold
The number people quote, in the IRS's own words: you usually must pay self-employment tax if you had net earnings from self-employment of $400 or more. The self-employed tax centre adds the filing side of it: you have to file an income tax return if those net earnings were $400 or more, and below that you still file if you meet another filing requirement, which most people with a W-2 job do.
Net earnings is the operative phrase in both sentences, which means the threshold is measured after expenses rather than on what you invoiced.
The One-Half Deduction
The IRS allows one deduction against the tax's effect on your income tax: when figuring your adjusted gross income, you can deduct one-half of the self-employment tax. You calculate it on Schedule SE and carry it to Schedule 1.
Two things it does not do, both worth stating because the name misleads. It does not reduce the self-employment tax itself, and it does not appear as an itemised deduction. It reduces adjusted gross income, which is what income tax is measured on, and that in turn can affect figures that travel with AGI, such as the income limits on certain credits and contributions.
The Extra 0.9% Above the Threshold
Medicare has a second layer for higher earners. The IRS topic on Additional Medicare Tax states that a 0.9% tax applies to Medicare wages, self-employment income and railroad retirement compensation above $250,000 for a married couple filing jointly, $125,000 for married filing separately, and $200,000 for all other taxpayers. It also notes that if you receive both Medicare wages and self-employment income, you combine them when working out whether you are over the threshold.
So there are two thresholds in this system, not one: the wage base above, which caps the Social Security portion at $184,500 of earnings, and this one, which adds 0.9% on top of the 2.9% rather than replacing any part of it.
How the Bill Gets Paid
Quarterly, through the estimated tax system. The self-employed tax centre describes the mechanism: estimated tax is the method used to pay Social Security, Medicare and income taxes, because you do not have an employer withholding them for you, and Form 1040-ES is the form used to work them out, with a worksheet similar to the 1040 itself.
The arithmetic inside that worksheet is the reason the quarterly figure looks unfamiliar the first time: it covers income tax and self-employment tax together, and it is calculated from the return you filed last year rather than from the year you are in.
Small Income and Loss Years
A year with a loss or a small profit has a wrinkle that works in your favour. The IRS points to two optional methods in the Schedule SE instructions, available when you had a loss or a small amount of income, which compute net earnings on a different basis and can produce a higher figure than the real one.
Paying social security tax on more than you earned sounds like an error, and it is deliberate: the figure on Schedule SE is what the Social Security Administration uses to compute your benefits, so the optional methods exist to stop a thin year from leaving a hole in your record.
Frequently Asked Questions
Is self-employment tax the same as income tax?
No, and they are paid on different things. Income tax is on your taxable income after deductions and credits. Self-employment tax is Social Security and Medicare, calculated on net earnings from self-employment, and it is what funds your future benefit record. The IRS describes them as paid in addition to each other, and an estimated tax payment covers both at once, which is why the quarterly figure can look larger than the income tax alone.
Do I pay self-employment tax on the full amount I invoiced?
No. The tax applies to net earnings, which the IRS defines as gross income from the business minus ordinary and necessary business expenses, and then only to 92.35% of that figure. The 7.65% that is left out exists so the self-employed are treated roughly the same as employees whose employer pays half.
What is the wage base, and does it apply to me?
Only the Social Security portion has one. The IRS states that for earnings in 2026 the base limit is $184,500, and that there is no wage base limit for Medicare tax, so every dollar of net earnings above that figure still pays the 2.9%. If your net earnings are below it, which for a side hustle they usually are, the cap changes nothing about your calculation.
What is the one-half deduction, and where do I claim it?
The IRS allows you to deduct one-half of the self-employment tax when figuring adjusted gross income, and you calculate it on Schedule SE and carry it to Schedule 1. It reduces income tax, not the self-employment tax itself, so it is worth claiming even though it does not shrink the 15.3% line.
When does the extra 0.9% apply?
Above a filing-status threshold. The Additional Medicare Tax is 0.9% and applies to self-employment income above $250,000 for a married couple filing jointly, $125,000 for married filing separately, and $200,000 for everyone else. If you have both a salary and a side hustle, the IRS says to combine Medicare wages and self-employment income when working out whether you are over the threshold.
What if my side hustle only made a little, or lost money?
Below $400 of net earnings the self-employment tax generally does not apply, though you still report the income if you are filing for another reason. If you had a loss or a small amount of income, the IRS points to the two optional methods in the Schedule SE instructions, which can raise your net earnings for tax purposes, and therefore your Social Security record, in a year when the real figure is low.
Sources
Every rate, threshold and quoted phrase was read from these IRS pages on September 28, 2026.
- IRS, self-employment tax topic, for the 12.4% and 2.9% split, the 92.35% factor, the $400 threshold, the one-half deduction calculated on Schedule SE, and the definition of net earnings
- IRS, self-employed individuals tax center, for the filing requirement at $400, the description of the tax as similar to the amounts withheld from wage earners, the estimated tax mechanism and Form 1040-ES
- IRS, Social Security and Medicare withholding rates, for the 2026 Social Security wage base limit of $184,500 and the statement that there is no wage base limit for Medicare tax
- IRS, Additional Medicare tax topic, for the 0.9% rate and the three filing status thresholds, and for combining Medicare wages with self-employment income
- Schedule SE (Form 1040), for the line where Schedule C's net profit enters the calculation and the line where the self-employment tax is reported
For the form that feeds this calculation, see Schedule C explained. For the payments themselves, see quarterly estimated taxes.
