AGI for the Self-Employed: Schedule C, SE Tax, and Deductions

To calculate AGI for a self-employed person, start with the net profit from your Schedule C, add any other income, then subtract the above-the-line adjustments you qualify for: half of your self-employment tax, self-employed health insurance premiums, retirement plan contributions, and a handful of other common deductions. The result lands on Form 1040, line 11.1Internal Revenue Service. Adjusted Gross Income

The steps below walk through each piece in the order it appears on the return, with a worked example at the end.

Step 1: Net Profit From Schedule C

Your starting number is the net profit or loss from Schedule C (Profit or Loss From Business), line 31. You report all business revenue, subtract ordinary and necessary business expenses, and the single figure that comes out is what enters your 1040.2Internal Revenue Service. Schedule C (Form 1040) – Profit or Loss From Business Farmers use Schedule F instead, which works the same way with farm-specific categories.3Internal Revenue Service. About Schedule F (Form 1040), Profit or Loss From Farming

Rent, utilities, supplies, business mileage, cost of goods sold, advertising, and contractor payments are all deductible business expenses. So is the home office, if you use part of your home exclusively and regularly for business. The simplified method allows $5 per square foot up to 300 square feet, capping at $1,500. The regular method tracks actual expenses proportionally and often yields a larger deduction, but requires more recordkeeping.

Equipment purchases can produce large deductions in the year you buy. Under the One Big Beautiful Bill Act, 100% bonus depreciation was permanently restored for qualifying business assets placed in service after January 19, 2025, so eligible equipment can be deducted in full rather than spread across several years. That deduction lands on Schedule C and directly reduces the profit that flows into your AGI.

Schedule C net profit flows to Schedule 1 (Form 1040), line 3, and also to Schedule SE to compute self-employment tax.4Internal Revenue Service. Instructions for Schedule C (Form 1040) A net loss offsets other income, though the excess business loss limitation under Section 461(l) can cap how much loss is usable in a single year; disallowed amounts carry forward as a net operating loss.

Example: a sole proprietor with $150,000 in gross receipts and $40,000 in documented expenses reports $110,000 of net self-employment income. That $110,000 is the number that drives everything after.

Step 2: Subtract Half of Your Self-Employment Tax

Self-employment tax is Social Security and Medicare combined. W-2 employees split these taxes with an employer; when you’re self-employed you pay both halves, which gives SE tax a headline rate of 15.3%: 12.4% for Social Security and 2.9% for Medicare.5Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)

Before applying the rate, reduce your net earnings by 7.65%. You compute SE tax on 92.35% of Schedule C profit.6Internal Revenue Service. Topic No. 554 – Self-Employment Tax Using the $110,000 example, the taxable base is $110,000 × 0.9235 = $101,585, and total SE tax comes to roughly $15,543.

The 12.4% Social Security portion applies only up to the wage base, which is $184,500 for 2026.7Social Security Administration. Contribution and Benefit Base Earnings above that still owe the 2.9% Medicare tax. If your net self-employment earnings exceed $200,000 (or $250,000 married filing jointly), an Additional Medicare Tax of 0.9% applies to the excess.8Internal Revenue Service. Questions and Answers for the Additional Medicare Tax

The AGI benefit: you deduct exactly half of the SE tax as an adjustment to income on Schedule 1, line 15.9Internal Revenue Service. Schedule 1 (Form 1040) In the example, roughly $7,772 comes off before AGI is calculated. This adjustment lowers your income tax; it does not lower the SE tax itself.5Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)

Step 3: Subtract the Other Above-the-Line Deductions

Above-the-line deductions (formally, “adjustments to income”) reduce AGI whether you take the standard deduction or itemize. The self-employed have several that W-2 workers do not.

Self-Employed Health Insurance

You can deduct 100% of health insurance premiums paid for yourself, your spouse, your dependents, and children under age 27, as long as the insurance is established under your business.10Internal Revenue Service. Instructions for Form 7206 – Self-Employed Health Insurance Deduction Medical, dental, vision, and qualified long-term care premiums all qualify (long-term care has age-based caps). The deduction goes on Schedule 1, line 17.

Two limits. You cannot take the deduction for any month you were eligible to participate in a subsidized health plan through any employer, including your spouse’s, even if you didn’t enroll.10Internal Revenue Service. Instructions for Form 7206 – Self-Employed Health Insurance Deduction And the deduction cannot exceed the net profit of the business that established the plan; it cannot create or increase a loss.

Retirement Plan Contributions

Self-employed retirement plans usually produce the largest AGI reductions available. The deduction appears on Schedule 1, line 16. 2026 limits:

Note that “net adjusted self-employment earnings” means Schedule C profit minus half of SE tax, so this calculation depends on the number you produced in Step 2.

Other Common Adjustments

Self-employed filers also get the same adjustments any taxpayer can use. Deductible Traditional IRA contributions run up to $7,500 for 2026 ($8,600 at age 50 or older), subject to workplace-plan and income phase-out rules. Student loan interest is deductible up to $2,500 a year within the income phase-outs. Health savings account contributions reduce AGI if you carry a qualifying high-deductible health plan.

Putting It Together: A Worked Example

Total income on Form 1040, line 9, is your net business income plus any other income (wages, investment income, rental income). Total adjustments from Schedule 1, line 26, flow to Form 1040, line 10. Line 9 minus line 10 is your AGI on line 11.13Internal Revenue Service. Definition of Adjusted Gross Income

Running the sole proprietor from above all the way through:

  • Schedule C net profit: $110,000
  • SE tax base: $110,000 × 0.9235 = $101,585
  • Total SE tax: $101,585 × 0.153 = $15,543
  • Deductible half of SE tax: $7,772
  • Self-employed health insurance premiums: $9,600
  • SEP IRA contribution (25% of adjusted earnings): ($110,000 − $7,772) × 0.25 = $25,557
  • Total adjustments: $42,929
  • AGI: $110,000 − $42,929 = $67,071

That taxpayer turned $110,000 of business income into an AGI near $67,000 without giving up a dollar of revenue. The whole gap comes from legitimate above-the-line deductions, which is why the self-employed AGI calculation rewards attention to detail in a way the W-2 version does not.

What the QBI Deduction Doesn’t Do

One point of frequent confusion: the Section 199A Qualified Business Income deduction, which lets eligible self-employed taxpayers deduct up to 20% of qualified business income, is a below-the-line deduction.14Internal Revenue Service. Qualified Business Income Deduction It reduces taxable income, not AGI. You calculate AGI first, and taxable income (after AGI and either the standard deduction or itemized deductions) is what the QBI rules look at when deciding whether you qualify for the full 20%, a phased-down amount, or nothing. If you’re trying to get to AGI, QBI is not part of the arithmetic.