Self-Employment Tax for Contractors, in Plain English

The first tax season after going out on your own surprises a lot of contractors. When you worked for someone else, your employer withheld your share of Social Security and Medicare and quietly paid its own matching share. Now you pay both shares yourself, and nothing is withheld unless you set aside the money. This guide explains how it works using the IRS’s pages, checked October 30, 2026. It is education only; a CPA or enrolled agent can figure your actual tax.

What is self-employment tax?

The IRS describes self-employment tax (SE tax) as Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from most wage earners’ pay. SE tax is separate from income tax: you can owe SE tax even in a year when you owe little or no income tax.

Who has to pay it?

The IRS says you must pay self-employment tax and file Schedule SE (Form 1040) if your net earnings from self-employment were $400 or more. That generally includes sole proprietors and independent contractors, and members of an LLC taxed as a sole proprietorship or partnership. If you’re still choosing a structure, see our LLC vs. sole proprietor guide.

Net earnings are based on your business profit: what you bring in minus your ordinary and necessary business expenses (materials, tools, vehicle costs, insurance, licenses and so on). Good records lower the number you pay tax on, legally. Our sister site True Trade Guide explains mileage records for work vehicles.

What is the rate in 2026?

From the IRS:

• The self-employment tax rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare.
• For 2026, the Social Security part applies to the first $184,500 of your combined wages, tips and net earnings. Above that, only the Medicare part applies.
• An additional 0.9% Medicare tax applies when wages, compensation or self-employment income exceed a threshold for your filing status: $200,000 for single filers, $250,000 for married filing jointly, and $125,000 for married filing separately.

The Social Security Administration publishes the same $184,500 contribution and benefit base for 2026. These limits change every year, so check the current numbers before you plan.

Why is it 15.3% when employees pay 7.65%?

Employees pay 6.2% Social Security plus 1.45% Medicare, and their employer pays a matching 7.65% (IRS Publication 15 lists those 2026 rates). When you’re self-employed, you are both the worker and the employer, so you pay both halves: 7.65% plus 7.65% equals 15.3%.

Is any of it deductible?

Yes. The IRS says you can deduct the employer-equivalent portion of your SE tax when figuring your adjusted gross income. That deduction lowers your income tax only; the IRS notes it doesn’t change your net earnings from self-employment or the SE tax itself. Schedule SE walks through the calculation.

Separately, many self-employed people may qualify for the qualified business income (QBI) deduction, which the IRS says lets eligible taxpayers deduct up to 20 percent of their qualified business income, subject to limits. It reduces income tax, not SE tax. Ask a tax professional whether it applies to you.

How do estimated tax payments work?

Because no one withholds tax from your job payments, the IRS expects you to pay as you earn. It says individuals, including sole proprietors, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when they file. Estimated payments cover income tax and self-employment tax.

• The year is divided into four payment periods, each with its own due date listed on the IRS estimated tax page.
• You can pay with Form 1040-ES by mail, or online, by phone, from the IRS app, or through your IRS online account.
• If you don’t pay enough by each due date, the IRS says you may owe a penalty, even if you’re due a refund when you file.

Your state may have its own estimated tax. California: the Franchise Tax Board says sole proprietors pay estimated state tax with Form 540-ES.

How do you handle uneven income?

Contracting income rarely arrives in neat monthly amounts. A few habits that make SE tax manageable:

• Use a separate business account for job payments and expenses, so your profit is easy to see.
• Set aside a share of every payment in a savings account for taxes. A CPA can suggest a percentage based on your expected profit and state.
• Look at your numbers before each due date and pay based on what you’ve actually earned so far.
• Keep receipts and mileage records as you go; the IRS recordkeeping page explains what to keep and for how long.

What if you also have a W-2 job?

Many contractors start their business on the side while still working for an employer. The IRS says the 2026 Social Security limit of $184,500 applies to your combined wages, tips and net earnings. Social Security tax already withheld from your paychecks counts toward that limit, so if your wages and business profit together go over it, the Social Security part of SE tax applies only up to the limit. The Medicare part applies to all of your net earnings. Schedule SE has lines for this; it is worth having a professional check the math in your first year.

Which forms do you file?

For a sole proprietor or single-member LLC taxed as one, the IRS lists these forms:

• Schedule C (Form 1040) to report business income and expenses and figure your profit;
• Schedule SE (Form 1040) to figure self-employment tax on that profit;
• Form 1040-ES for estimated tax payments during the year; and
• your Form 1040, where the SE tax and the deduction for its employer-equivalent portion both appear.

If customers or general contractors paid you $600 or more for 2025 work, you may receive Forms 1099-NEC; for payments made in 2026, IRS Publication 15 notes the reporting threshold rises to $2,000. You report all of your business income either way, whether or not you receive a 1099.

What changes if you hire?

Your own SE tax doesn’t change, but you add payroll taxes for employees: withholding their share, paying the employer share and federal unemployment tax. See our first-employee guide. If you pay subcontractors instead, read employee vs. independent contractor first.