How to Calculate Self-Employment Tax (IRS Method Explained)

Official Source Basis

This explanation follows official IRS guidance published in the
Instructions for Schedule SE (Form 1040),
the IRS Publication 334 — Tax Guide for Small Business,
and the IRS Self-Employed Individuals Tax Center.
These sources describe how net earnings are calculated and how Social Security and Medicare taxes apply to self-employed income.

What Is Included in Self-Employment Tax

Self-employment tax consists of Social Security and Medicare taxes normally shared between employees and employers.
Self-employed taxpayers pay both portions because income is not subject to payroll withholding.

• 12.4 percent Social Security tax
• 2.9 percent Medicare tax

The combined rate is 15.3 percent of eligible net earnings from self-employment under IRS rules.

Step 1: Calculate Net Business Profit

The first step is determining net profit from business activities.
Taxpayers calculate profit or loss using Schedule C.
Business expenses reduce total income before self-employment tax applies.

Net profit generally equals total business income minus ordinary and necessary business expenses allowed by the IRS.

Step 2: Apply the IRS Net Earnings Adjustment

The IRS requires an adjustment before calculating self-employment tax.
Only a portion of net profit is subject to self-employment tax.

According to Schedule SE instructions, taxpayers multiply net profit by 92.35 percent.
This adjustment reflects the employer-equivalent share of payroll taxes.

• Net profit × 92.35% = Net earnings subject to self-employment tax

Step 3: Apply the Self-Employment Tax Rate

After determining adjusted net earnings, the self-employment tax rate is applied.
The combined rate is 15.3 percent.

• 12.4 percent applies to Social Security tax up to the annual wage base limit
• 2.9 percent Medicare tax applies to all qualifying earnings

Higher-income taxpayers may also be subject to Additional Medicare Tax as explained in IRS guidance.

Example of IRS Self-Employment Tax Calculation

The following simplified example shows how the IRS method works.

• Net business profit: $60,000
• Adjusted earnings: $60,000 × 92.35% = $55,410
• Self-employment tax: $55,410 × 15.3%

The resulting amount represents total Social Security and Medicare tax owed on self-employment income.
Actual calculations are completed using Schedule SE when filing Form 1040.

Step 4: Deduct Half of Self-Employment Tax

The IRS allows taxpayers to deduct one-half of self-employment tax as an adjustment to income.
This deduction reduces adjusted gross income but does not reduce the self-employment tax itself.

The deduction is reported directly on Form 1040 after Schedule SE is completed.

When Self-Employment Tax Applies

According to IRS rules, self-employment tax generally applies when net earnings from self-employment reach $400 or more during the tax year.
Income below this threshold usually does not require Schedule SE filing.

Estimated Tax Payments and Planning

Because taxes are not withheld from most self-employed income, many taxpayers must make quarterly estimated tax payments.
Estimated payments usually include both income tax and self-employment tax obligations.

Payment calculation rules are explained in
IRS Publication 505 — Tax Withholding and Estimated Tax.
Tracking payments during the year using the Estimated Tax Planner (#13)
can help avoid underpayment penalties.

Records Needed for Accurate Calculation

Accurate calculations depend on organized bookkeeping records.
The IRS requires documentation supporting income and deductions reported on Schedule C.

• Income statements and Forms 1099
• Expense receipts and accounting summaries
• Vehicle mileage records when applicable
• Asset purchase documentation
• Prior year depreciation schedules

Preparation tools available on the
1040 Excel preparation page
can help organize business income before calculating tax liability.

Common Calculation Mistakes

IRS guidance shows several frequent errors made by self-employed taxpayers.
Avoiding these mistakes improves filing accuracy.

• Calculating tax using gross income instead of net profit
• Skipping the 92.35 percent adjustment
• Forgetting the Schedule SE requirement
• Missing deductible expenses
• Incorrect estimated payment reporting

Final Thoughts

Learning how to calculate self-employment tax using the IRS method helps taxpayers estimate obligations before filing.
Accurate records and proper Schedule SE calculations reduce surprises during tax season.
Following official IRS guidance remains the most reliable way to calculate and report self-employment tax correctly.