One of the first things new freelancers discover — often at tax time — is that they owe a lot more than they expected. A big part of the reason is self-employment tax.

Here’s what it is, how it’s calculated, and how to legally reduce what you owe.

What Is Self-Employment Tax?

When you’re an employee, you pay 7.65% in FICA taxes (Social Security and Medicare) and your employer pays a matching 7.65%. The total going to the government is 15.3%.

When you’re self-employed, you are both the employee and the employer. That means you pay the full 15.3%.

Self-employment tax is made up of:

• 12.4% Social Security tax — on net self-employment income up to the annual wage base ($176,100 for 2026; adjusts annually with inflation)
• 2.9% Medicare tax — on all net self-employment income, with no cap

If your net self-employment income exceeds $200,000 (single filer) or $250,000 (married filing jointly), you also owe an additional 0.9% Additional Medicare Tax on the amount over those thresholds.

How It’s Calculated

Self-employment tax isn’t calculated on your gross income — it’s calculated on your net self-employment income (revenue minus business deductions). And there’s one more adjustment: the IRS lets you apply the tax to 92.35% of net income, not 100%. This accounts for the fact that employees don’t pay SE tax on the employer’s matching portion.

The formula:

Net SE income × 92.35% × 15.3% = SE tax owed

Example:

• Freelance revenue: $80,000
• Business deductions: $15,000
• Net SE income: $65,000
• Taxable SE income: $65,000 × 92.35% = $60,028
• SE tax: $60,028 × 15.3% = $9,184

That’s before income tax. The combined hit can come as a shock if you weren’t setting money aside throughout the year.

The Two Deductions That Reduce SE Tax

Here’s the good news: the IRS gives self-employed workers two deductions that directly offset SE tax.

1. Deduct Half of SE Tax on Your Income Taxes

You can deduct 50% of your self-employment tax as an above-the-line deduction on your Form 1040. In the example above, that’s $9,184 ÷ 2 = $4,592 deduction.

This doesn’t reduce your SE tax itself, but it reduces the income on which your income tax is calculated. At a 22% bracket, that’s about $1,010 back in your pocket.

2. Reduce Net SE Income with Business Deductions

Every legitimate business deduction lowers your net self-employment income, which directly shrinks the base on which SE tax is calculated.

In the example above, $15,000 in business deductions saved not only income tax but also $2,123 in SE tax ($15,000 × 92.35% × 15.3%). Track every deductible expense — it reduces SE tax, not just income tax.

How to Actually Reduce SE Tax

Beyond the standard deductions, there are a few structural strategies:

Contribute to a Retirement Account

SEP-IRA and Solo 401(k) contributions reduce your net self-employment income, lowering both income tax and SE tax. A $10,000 SEP-IRA contribution on $65,000 net income saves roughly $1,415 in SE tax alone, plus the income tax savings on top.

Elect S-Corp Status (High-Income Freelancers)

Once your net profit reliably exceeds around $60,000–$80,000, it may be worth electing S-Corp status for your LLC. As an S-Corp owner, you pay yourself a “reasonable salary” (subject to SE tax) and take the rest as distributions (not subject to SE tax). Done correctly, this can save thousands per year — but adds complexity: payroll, corporate formalities, and accounting costs.

This strategy is worth discussing with a CPA if you’re consistently earning above that threshold.

Keep Your Business Deductions Current

It sounds obvious, but the most common way freelancers overpay SE tax is by underreporting deductions. Home office, mileage, equipment, software, professional fees — every dollar of legitimate deductions reduces your SE tax base.

What to Set Aside

A common rule of thumb for freelancers: set aside 25–30% of every payment you receive. This covers SE tax plus income tax for most people in the 22% bracket. If you’re earning significantly more, you may need to set aside closer to 35–40%.

The cleaner approach: calculate your actual estimated tax each quarter based on your real numbers, rather than relying on a percentage estimate.

SE Tax vs. Income Tax: Two Separate Bills

It helps to think of these as two separate obligations:

• SE tax (15.3%): A flat rate on your net business income (after the 92.35% adjustment). Predictable.
• Income tax: Based on your marginal bracket, after all deductions including the SE tax deduction and retirement contributions. Variable.

Both are owed at the same time, but understanding them separately makes tax planning clearer.

numlr tracks your income and expenses in real time, so you always know your net self-employment income — and can estimate your SE tax liability at any point in the year. No more April surprises. Try numlr free.