Self-Employment Tax Explained: What You Owe

Last updated: September 2026 · Written by Hugo Cardozo

The tax employees never see broken out

When you work for an employer, they pay half of your Social Security and Medicare tax and withhold the other half from your paycheck — most employees never see the employer's half itemized anywhere. When you're self-employed, you're both the employer and the employee, so you owe both halves yourself: 15.3% combined, applied to 92.35% of your net profit.

The 2026 Social Security wage base

The 12.4% Social Security portion of that 15.3% only applies up to an annual cap — $184,500 for 2026 (up from $176,100 in 2025). Profit above that amount only owes the uncapped 2.9% Medicare portion. If you also have W-2 wages from another job, those count toward using up the cap first.

It's separate from income tax

Self-employment tax funds Social Security and Medicare specifically — it's calculated and owed independently of federal and state income tax on the same profit. Both apply, which is why total self-employment tax obligations often surprise people who only budgeted for "income tax" in the usual sense.

The deduction that softens it slightly

The IRS lets you deduct half of your self-employment tax when calculating taxable income for income tax purposes — mirroring how an employer's half of payroll tax was never counted as your income in the first place. It reduces the income tax bill somewhat, but doesn't touch the self-employment tax itself.

Why quarterly, not just at filing

Because no employer is withholding tax throughout the year on your behalf, the IRS expects estimated payments four times a year if you expect to owe $1,000 or more for the year. Skipping ahead to pay everything at filing time — even the correct total amount — can still trigger an underpayment penalty for not paying enough, on time, throughout the year.

Frequently asked questions

Do I owe self-employment tax on a side hustle if I also have a regular job?

Yes, if the net profit from self-employment is $400 or more for the year, it's subject to self-employment tax regardless of whether you also have W-2 income elsewhere — though your W-2 wages count first toward the Social Security wage base cap.

Does forming an LLC change self-employment tax?

Not by itself — a single-member LLC is typically taxed the same as sole proprietorship income by default (a "disregarded entity"). Electing S-corp tax treatment can change how self-employment tax applies to part of the income, but that's a more complex decision usually worth discussing with a tax professional.

What happens if I underpay my quarterly estimated taxes?

The IRS can charge an underpayment penalty based on how much was owed and how late it was paid, even if the full amount is eventually paid at filing time. Paying at least the estimated quarterly amounts on time is the standard way to avoid that penalty.