The Tax MathNotebook

§ VII

Chapter VII

Filed under: self-employment, Schedule C, SE tax, QBI deduction, quarterly estimates.

Effective Tax Rate for the Self-Employed

Self-employment changes the FICA picture, adds the QBI deduction, and replaces withholding with quarterly estimated payments. The arithmetic is more involved but still mechanical.

§ 1

The 15.3% headline

Both halves of FICA, paid by one person. The deductible half softens the blow.

W-2 employees pay 7.65 percent FICA. Their employer pays a matching 7.65. Self-employed filers pay both halves themselves: 12.4 percent Social Security on net earnings up to the wage base, and 2.9 percent Medicare on all net earnings, for a combined 15.3 percent on the first $184,500 of self-employment income (2026). The 0.9 percent Additional Medicare applies above $200,000 single ($250,000 MFJ).

SE tax is computed on 92.35 percent of net Schedule C earnings (the formula is roughly an employer-share workaround). Half of the SE tax is then deductible "above the line" against federal income tax. So while the headline 15.3 percent rate is real, the after-deduction economics are noticeably less brutal than they first appear.

§ 2Worked Example, $100,000 Schedule C, Single, 2026

Self-employment tax

  1. Net SE earnings 100,000 × 0.9235  =  92,350
  2. SS portion: 92,350 × 0.124  =  11,451
  3. Medicare: 92,350 × 0.029  =  2,678
  4. Total SE tax  =  14,130
  5. Deductible half: 7,065 (above the line)

Federal income tax

  1. Net 100,000 − 7,065 (SE half)  =  92,935 AGI
  2. 92,935 − 16,100 std. ded.  =  76,835 before QBI
  3. QBI deduction: the lesser of 20% × 92,935 (18,587) and 20% × 76,835 (15,367)  =  15,367
  4. 76,835 − 15,367  =  61,468 taxable
  5. Tax: 1,240 + 4,560 + 2,434.96  =  8,235
  6. Federal income tax  =  8,235

Total federal

$22,365

SE tax + income tax

Effective on $100K

22.4%

vs ~20.8% W-2

Quarterly estimate

~$5,591

due Apr/Jun/Sep/Jan

§ 3The QBI Deduction

Section 199A allows most pass-through business owners (sole proprietors, single-member LLCs, partners, S-corp shareholders) to deduct up to 20 percent of qualified business income (QBI). For 2026, the full deduction is available below taxable income of approximately $201,750 single / $403,500 MFJ. Above those thresholds, "specified service trades or businesses" (consulting, law, medicine, accounting, financial services, athletics, performing arts) face phase-outs and eventual elimination of the deduction. Non-SSTB businesses retain the deduction subject to a wage-and-property cap.

The QBI deduction is taken below the line but does not reduce SE tax. It reduces only federal income tax. It is also capped at 20 percent of taxable income before the deduction, and for a sole proprietor taking the standard deduction that cap is usually the lower figure. In the $100,000 Schedule C example above, 20 percent of QBI is $18,587 but the cap holds the deduction to $15,367, which saves approximately $3,381 of federal income tax at the 22 percent marginal rate.

§ 4Quarterly Estimated Payments

The IRS expects tax to be paid as it is earned. Self-employed filers without W-2 withholding must make quarterly estimated payments on April 15, June 15, September 15, and January 15. Underpayment triggers a penalty. The safe harbor: pay at least 100 percent of last year's total tax (110 percent if your AGI exceeded $150,000), or 90 percent of the current year's actual tax, whichever is smaller.

The simplest practice for an established freelancer: divide last year's total federal tax by four and pay that each quarter, then settle the balance with the April return. New freelancers without a prior-year baseline should set aside 25 to 30 percent of every invoice in a separate account and pay quarterly from there.