Self-Employment Tax Explained (And How Much to Set Aside)

Self-employment tax is 15.3 percent of your net earnings, 12.4 percent for Social Security plus 2.9 percent for Medicare, and if you are single, expect roughly a quarter of profit to go to all taxes combined in a moderate state, so set aside 25 to 30 percent of every deposit. That is the short answer. The derivation is below, because the number is computable from your own filing status in about ten minutes, and the Money and Bookkeeping module walks it with 2026 figures and worksheets.

Why the bill shocks people

When you earned wages, you paid 7.65 percent of every dollar into Social Security and Medicare: 6.2 plus 1.45, line after line on the stub. What you never saw was your employer legally required to pay a matching 7.65 percent on top, out of the company's pocket. The government collects both halves from every dollar of labor. Employees just get to see only theirs.

Self-employed, you are both halves, and the IRS calls the combined 15.3 percent self-employment tax. One ceiling applies: the Social Security piece stops past $184,500 of earnings for 2026, while Medicare has no cap at all. In a first year, the ceiling is a fact to know exists, not one you will brush.

Two details make the arithmetic napkin-friendly, both from the IRS's own page. The tax applies once net earnings from self-employment reach $400 for the year, so a hobby-level experiment owes nothing, while a real business crosses the line almost immediately. And you do not pay the 15.3 percent on every dollar of profit; you pay it on 92.35 percent of net earnings, a haircut that keeps sole proprietors roughly level with incorporated competitors. In practice that is about 14.1 cents on the dollar, so round to fourteen in your head. You also get to deduct half of the tax from your income tax, a small fairness mechanism.

One word carries most of the weight in all of that: net. The tax lands on profit, revenue minus legitimate business expenses, not on revenue. This is why business money lives in its own account from week one, because a mixed account produces guesses, and guesses at tax time err toward paying more.

The worked set-aside

Everyone quotes a set-aside number at new owners. The honest answer is derived, not quoted. The stack runs in a fixed order: self-employment tax first at about 14.1 cents per dollar of profit, federal income tax second, state income tax third, buffer last.

The module's worked example, a single filer expecting $50,000 of profit in a state with a 5 percent income tax. Self-employment tax: $50,000 times 92.35 percent times 15.3 percent is $7,065. Half of that, $3,532, comes off the top, leaving $46,468. Subtract the 2026 standard deduction of $16,100 for single filers to get $30,368. The qualified business income deduction, up to 20 percent of qualified business income, takes another $6,074, leaving taxable income of $24,294. Federal income tax at the 2026 brackets, 10 percent up to $12,400 and 12 percent above it, runs $2,667. Federal total: $9,732. State at 5 percent: $2,500. Everything: $12,232.

Divide by profit: 24.5 percent. So this owner sets aside 25, rounded up to the nearest five.

The same machinery at other scales gives the anchors worth remembering. A single filer expecting $20,000 of profit in that same state computes to roughly 20 percent all-in, because the standard deduction shelters so much of a small profit. Expecting $100,000 pushes part of the income into the 22 percent bracket and the total toward the high twenties. No state income tax, subtract the state slice. This is why nobody should hand you a number to memorize: the number moves with your life, and now you know how it moves.

The mechanics that make it survivable

Estimated taxes run quarterly, due in April, June, September, and January. The safe harbors forgive honest approximation: owe under $1,000, or pay 90 percent of the current year's tax, or 100 percent of last year's, 110 percent if prior AGI topped $150,000. What the system does not forgive is the owner who spent the tax money because no account was waiting to receive it.

So the method, not the dread. When a deposit lands, a computed percentage moves to a separate tax account the same day, and the quarterly payment is pre-funded instead of ambushed. Reframe the refund while you are at it: owners treat a refund like an error, when it is the system reporting success, every bill covered plus a bonus landing in the owner-pay column. A balance due means only that the percentage needs a look.

Round up, always. Rounding 24.5 to 25 costs the example owner about $250 of short-term liquidity across the year and buys a boring April. Under-round and you get the worst outcome in personal finance: technically right, emotionally bankrupting.

And the frame that changes behavior, which the module puts best: the tax money was never yours. Somewhere between a quarter and a third of every dollar of profit legally belongs to the federal government and your state, and holding onto it for eleven months is not saving. You are the trustee of that account. The transfer is you being an honest trustee.

Re-run the derivation twice a year and whenever your profit guess moves a lot, since brackets and thresholds adjust annually. If the business is not chosen yet, the fit quiz comes before the percentages. Then the money module builds the account structure the set-aside runs on.