Self-Employment Tax and the QBI Deduction: What eBay Sellers Actually Owe

A new eBay seller finishes the year with a profit of $10,000, opens the tax software, and sees a bill for federal tax even though the standard deduction should have wiped out any income tax. The bill is self-employment tax, and it is the part of the sole proprietor's tax bill that surprises people most, because it does not care about the standard deduction. A second line on the same return, the qualified business income deduction, then claws some of the money back. This guide follows one profit figure through both, with the 2026 numbers checked against IRS pages in October 2026.

1. Two taxes on one profit

Your Schedule C net profit (line 31) feeds two separate calculations. The IRS's instructions for Schedule C say to enter it on Schedule 1, line 3, which flows into income tax, and on Schedule SE, line 2, which produces self-employment tax. We walk through how that profit is built in our Schedule C guide; here we start from the profit and look at what happens next.

Income tax has a standard deduction and graduated rates. SE tax has neither. It is the self-employed person's version of the social security and Medicare taxes that an employer and employee split. The IRS explains that employers calculate those taxes for most wage earners, while you calculate SE tax yourself on Schedule SE, and that you can deduct the employer-equivalent portion when figuring adjusted gross income. Wage earners cannot deduct social security and Medicare taxes.

2. How self-employment tax is worked out

The IRS's page on self-employment tax gives the rate as 15.3 percent, made up of 12.4 percent for social security and 2.9 percent for Medicare. The 2025 Schedule SE form shows the order of operations:

1. Line 2: your net profit or loss from Schedule C, line 31.
2. Line 4a: if the amount is more than zero, multiply it by 92.35 percent (0.9235). Otherwise the line 3 amount is carried as it is.
3. Line 4c: if this is less than $400, the form says to stop: you do not owe self-employment tax.
4. Lines 7 to 10: the social security part is 12.4 percent of the smaller of your net earnings or the room left under the annual maximum after any wages already subject to social security tax.
5. Line 11: the Medicare part is 2.9 percent of the full net earnings figure.
6. Line 12: the two parts added together are your SE tax, which goes to Schedule 2.
7. Line 13: half of line 12, entered on Schedule 1, line 15, as a deduction.

The 92.35 percent factor is the reason the effective rate is lower than 15.3 percent of profit. Multiply 0.153 by 0.9235 and you get about 14.13 percent of net profit, until the cap applies.

The $400 test

The instructions for Schedule SE say you must file it if the amount on line 4c is $400 or more. Because line 4c is 92.35 percent of net profit, that corresponds to a profit of roughly $433, a figure worked out from the form rather than printed on it. The instructions also say the tax applies no matter how old you are and even if you are already getting social security or Medicare benefits. The Social Security Administration uses the information from Schedule SE to figure your benefits, so the tax is not simply a levy: it builds the record on which benefits are based.

Losses

If Schedule C shows a loss, the form carries the loss and line 4c is under $400, so there is no SE tax. The instructions add that even with a loss or a small amount of income it may help to file Schedule SE and use an optional method (which lets some people count earnings to protect social security coverage or credits). That is a niche election and one to discuss with a preparer.

3. The yearly cap and the extra 0.9 percent

The social security part applies only up to an annual limit. The Schedule SE instructions give $176,100 for 2025. The IRS's 2026 Form 1040-ES says the maximum amount of earned income (wages and net earnings from self-employment) subject to social security tax is $184,500 for 2026. The 12.4 percent social security part stops at that amount, while the 2.9 percent Medicare part is calculated on the full net earnings figure on line 11 of the 2025 form, with no cap. If you also had a job, wages already taxed for social security use up part of the base before your self-employment earnings count (lines 8a to 9 on the form).

A 0.9 percent Additional Medicare Tax can apply if the total on line 6 of all your Schedules SE, combined with wages, is over a threshold set by filing status. The Schedule SE instructions list $200,000 for single, head of household and qualifying surviving spouse, $250,000 for married filing jointly and $125,000 for married filing separately, and point to Form 8959. Most new sellers never reach those levels, but a growing business should know the cap exists on one side and the surtax on the other.

Check the year: IRS pages are not always updated at the same moment. One IRS overview of SE tax we opened still quoted the 2024 base of $168,600 in its text. The Schedule SE form for your tax year (line 7) and the Form 1040-ES for the year are the places to confirm the figure.

4. The half deduction

The deduction for one-half of SE tax appears on line 13 of Schedule SE and goes to Schedule 1, line 15. The IRS says it affects only income tax, not your net earnings from self-employment or the SE tax. The IRS also notes that the self-employed health insurance deduction is a separate item, calculated under its own rules in the Form 1040 and Schedule SE instructions. Both reduce your adjusted gross income, and both matter again in the QBI calculation below.

5. Two worked examples

The figures below are illustrative. They assume a single filer whose only income is the Schedule C profit, who takes the standard deduction of $16,100 for unmarried individuals in 2026 (from Revenue Procedure 2025-32), who has no health insurance deduction, credits, state taxes or other items. The 12 percent rate on income between $12,400 and $50,400 is from the same revenue procedure.

Example A: a $10,000 profit

• Net earnings: $10,000 x 0.9235 = $9,235.00.
• Social security part: $9,235.00 x 12.4 percent = $1,145.14. Medicare part: $9,235.00 x 2.9 percent = $267.82 (rounded). SE tax: $1,412.96.
• Half deduction: $706.48. Adjusted gross income: $9,293.52, below the $16,100 standard deduction, so income tax is zero.

This seller owes $1,412.96 of federal tax on a $10,000 profit and no income tax at all. That is the surprise the opening paragraph describes.

Example B: a $40,000 profit

The total is about 18.6 percent of the profit. Without the QBI deduction, taxable income would be $21,074.09 and income tax $2,280.89 ($1,240 plus 12 percent of $8,674.09), so the deduction saved $505.78 here. SE tax, at $5,651.82, is the larger share of the bill, which is typical at modest profits. The structure of this example is the point; your own figure depends on filing status, other income, credits and state rules.

6. The QBI deduction

What it is

The IRS describes the qualified business income deduction, also called the Section 199A deduction, as allowing eligible owners of sole proprietorships, partnerships, S corporations and some trusts and estates to deduct up to 20 percent of their qualified business income. It is available whether or not you itemize, it is taken below the line on Form 1040 (line 13a, computed on Form 8995 or Form 8995-A), and income earned as an employee or through a C corporation does not qualify. The deduction cannot exceed 20 percent of taxable income minus net capital gain, which is exactly the limit that bit in Example B.

What changed for 2026

In an IRS webinar script on the new law, the IRS says the One, Big, Beautiful Bill makes the QBI deduction permanent (it was due to expire), widens the phase-in range, and adds a minimum deduction. For a single filer the phase-in range goes from $50,000 to $75,000, and for joint filers from $100,000 to $150,000. The minimum deduction is $400, for a taxpayer with at least $1,000 of qualified business income from one or more active businesses in which they materially participate, for tax years beginning after 2025. Revenue Procedure 2025-32 sets the $400 and $1,000 amounts to be inflation-adjusted for taxable years beginning after 2026. The IRS page also says that, for years after 2025, the deduction is the greater of the usual limited amount or the minimum deduction.

The 2026 thresholds in Revenue Procedure 2025-32 are $201,750 for single and other returns (with a phase-in range ending at $276,750), and $403,500 for joint returns (ending at $553,500). Below the threshold, the simpler Form 8995 is generally used; the 2025 instructions put the limits at $197,300 and $394,600. Above it, Form 8995-A and the wage and property tests apply, and the specified service trade or business (SSTB) rules start to bite. The IRS's webinar answer lists law, accounting, consulting, athletics, financial services and health care as examples of SSTBs, and confirms the new law did not remove the SSTB restrictions. Selling goods is not among the examples the IRS gave, but if your income is near or above the threshold, check the definition in the Form 8995-A instructions with a preparer.

How qualified business income is figured

QBI is not simply Schedule C profit. The IRS says it is the net amount of qualified items of income, gain, deduction and loss from the business, and that it includes the deductible part of self-employment tax, the self-employed health insurance deduction and deductions for contributions to qualified retirement plans. That is why Example B used $37,174.09, the profit less half the SE tax. QBI excludes items such as capital gains or losses, wage income and interest not allocable to the business.

7. Paying it during the year

There is no employer withholding on Schedule C profit, so the IRS expects payments through the year. Its estimated taxes page says individuals including sole proprietors generally have to make estimated payments if they expect to owe $1,000 or more when the return is filed, and that most taxpayers avoid the underpayment penalty if they owe less than $1,000 after withholding and credits, or paid at least 90 percent of the current year's tax or 100 percent of the prior year's tax shown on the return, whichever is smaller. Form 1040-ES is the worksheet, and the IRS's page lists ways to pay including Direct Pay, EFTPS and your online account. The four payment periods and their due dates are on that page. Our seller tax overview covers how to set money aside, and the eBay fee calculator can show the true margin per sale so you know what profit you are actually generating.

If your business is a single-member LLC the same numbers apply, because the IRS treats it as a sole proprietorship unless it elects otherwise. Our guide to LLCs and sole proprietorships covers what that structure does and does not change. Other entity types and elections are a conversation for a tax professional.

8. Common mistakes

• Planning around income tax only. The standard deduction does not reduce SE tax, so a profit under the income tax threshold can still produce a bill.
• Using 15.3 percent of the full profit. The base is 92.35 percent of net profit, until the yearly cap.
• Forgetting the half deduction. It is on Schedule SE, line 13, and Schedule 1, line 15.
• Assuming the QBI deduction is 20 percent of profit. It is limited by taxable income, and QBI is already reduced by half the SE tax and similar deductions.
• Using last year's wage base. The cap changes yearly; use the Schedule SE form or Form 1040-ES for the year you are filing.
• Ignoring estimated payments. A large April bill and an underpayment penalty are avoidable.

Sellhelm, the eBay dropshipping software this blog belongs to, prices every listing from your real fees, which makes your profit figure more predictable before tax arrives.

Sources and how we checked

Facts in this guide were checked against these official pages in October 2026. Rules and figures change, so confirm anything that affects a decision. This is general information, not legal or tax advice.

• Instructions for Schedule SE (Form 1040), 2025 (IRS)
• Schedule SE (Form 1040), 2025 form (IRS)
• Self-employment tax (social security and Medicare taxes) (IRS)
• Topic no. 554, Self-employment tax (IRS)
• Form 1040-ES, 2026 (IRS)
• Qualified business income deduction (IRS)
• Instructions for Form 8995, 2025 (IRS)
• Revenue Procedure 2025-32, 2026 inflation adjustments (IRS)
• Understanding the Working Families Tax Cuts: Business Tax Provisions, webinar script (IRS)
• Estimated taxes (IRS)
• Instructions for Schedule C (Form 1040), 2025 (IRS)

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