The $400 self-employment line: what it actually measures

What the number measures

Almost everyone hears “$400” and pictures money coming in. That is not what the rule looks at.

The calculation starts with net profit from the business: gross receipts minus ordinary and necessary business expenses. That figure comes off Schedule C. It then moves to Schedule SE, where it is multiplied by 92.35 percent. The result is net earnings from self-employment. That is the number compared against $400.

The 92.35 percent factor exists to approximate parity with employees. An employer pays half of an employee’s Social Security and Medicare tax and deducts it as a business expense. A self-employed person pays both halves, so the law removes the equivalent of the employer share from the base before applying the rate.

What the tax is

Self-employment tax is Social Security and Medicare, collected from people who do not have an employer withholding it. The combined rate is 15.3 percent: 12.4 percent for Social Security and 2.9 percent for Medicare.

The two halves behave differently. The Social Security portion applies only up to an annual wage base, which is $176,100 for 2025 and $184,500 for 2026. Above that, the 12.4 percent stops. The Medicare portion has no ceiling; 2.9 percent applies to every dollar of net earnings.

An additional Medicare tax of 0.9 percent applies to wages and self-employment income above threshold amounts that depend on filing status: $250,000 on a joint return, $125,000 for married filing separately, and $200,000 in all other cases. It is computed on Form 8959 and is not matched by any employer contribution.

If you also work a W-2 job, the wages from that job count first against the Social Security wage base. Someone with $170,000 in wages and $40,000 of self-employment income does not pay the 12.4 percent on the full $40,000, because most of the base has already been used.

The deduction most people miss

You deduct one half of your self-employment tax on Schedule 1, as an adjustment to income. It is an above-the-line deduction, which means you take it whether or not you itemize, and it reduces adjusted gross income.

Lowering AGI is worth more than the deduction itself suggests, because AGI is the input to a long list of other calculations: the taxable portion of Social Security benefits, the premium tax credit, various phase-outs. This deduction reduces income tax. It does not reduce the self-employment tax itself.

What the $400 line does not do

Three misreadings are common enough to name.

It is not a filing threshold

Whether you must file an income tax return at all is governed by a different set of thresholds that depend on filing status, age, and total income. Net earnings of $400 or more is one of several conditions that independently require a return. Falling below $400 in self-employment earnings tells you nothing about whether you must file for other reasons.

It is not a “tax-free” allowance

Income below $400 in net earnings still belongs on your return as income. What the threshold turns off is the Social Security and Medicare component, not income tax. A person with $350 of net earnings and $90,000 of wages reports the $350 and pays ordinary income tax on it.

It has nothing to do with 1099 forms

This is the one worth being emphatic about. A Form 1099 is an information return filed by the payer. Its thresholds govern the payer’s reporting duty, not your reporting duty. Income is reportable because it is income.

The thresholds are also in motion right now, which makes the confusion worse:

• Form 1099-K. After several years of delayed transition rules, the reporting threshold for third-party settlement organizations reverted to more than $20,000 in aggregate payments and more than 200 transactions. Payment apps and marketplaces below that no longer have to send the form.
• Form 1099-NEC and 1099-MISC. The long-standing $600 threshold applies for 2025. For payments made in tax years beginning after 2025, the threshold rises to $2,000, and that amount may be adjusted for inflation beginning in calendar year 2027.

Read those together and the practical effect is clear. Fewer forms will be issued. The same income remains taxable. Anyone relying on the arrival of a 1099 to know what to report will underreport, and the mismatch will surface later.

Special cases

Church employee income. A separate and much lower threshold applies. If you had church employee income of $108.28 or more, self-employment tax applies to that income even though the general $400 rule does not reach it.

Losses. A net loss produces no self-employment tax. It may still offset other income for income tax purposes, subject to the rules on basis, at-risk amounts, and passive activities.

More than one business. Net earnings from all your self-employment activities are combined before the $400 test. Two ventures at $250 each are over the line together even though neither is alone.

California

California does not impose a separate state self-employment tax. There is no California equivalent of Schedule SE and no state Social Security or Medicare levy.

The same net profit still flows through to your California return. It is reported on Form 540 as part of income and taxed at California’s ordinary rates. And the state has its own registration and local requirements that have nothing to do with the $400 figure — a city business license, a fictitious business name statement, a seller’s permit if you sell tangible goods. Those obligations begin when the activity begins.

What to do about it

If you are running any activity for profit, keep books for it from the first dollar. Not because $400 is a large number, but because the only way to know which side of it you land on is to have the expenses recorded. Unrecorded expenses do not just cost you a deduction; they can push you over a threshold you never actually crossed.

Self-employment tax is also the reason quarterly estimated payments exist for most new business owners. The 15.3 percent arrives on top of income tax, and it is usually the part people did not budget for. We cover the payment schedule in our piece on quarterly estimated taxes in California.

Common questions

Is the $400 self-employment threshold based on gross income?

No. It is based on net earnings from self-employment, which is business profit after expenses multiplied by 92.35 percent. Gross receipts are not the measure.

If I made less than $400, do I still report the income?

Yes. The $400 threshold governs self-employment tax only. Self-employment income is reportable on your income tax return regardless of amount.

Do I only have to report income if I received a Form 1099?

No. Form 1099 thresholds govern the payer's reporting obligation, not yours. Income is reportable whether or not an information return was issued.

What is the self-employment tax rate?

15.3 percent, made up of 12.4 percent for Social Security and 2.9 percent for Medicare. The Social Security portion applies only up to the annual wage base, which is $176,100 for 2025 and $184,500 for 2026. The Medicare portion has no ceiling.

Can I deduct self-employment tax?

You deduct one half of your self-employment tax on Schedule 1 as an adjustment to income. It is available whether or not you itemize, and it reduces income tax rather than the self-employment tax itself.

Does California charge self-employment tax?

California does not impose a separate self-employment tax. The same net profit is reported on Form 540 and taxed at California's ordinary income rates.