Under the standard deduction and still owe tax? Yes. Here is why.

Between about 434 and 16,100 dollars of profit you owe 15.3 percent self-employment tax and zero income tax. Most side businesses find this out in April.

ExactSplit · Updated March 30, 2026

Two thresholds, nowhere near each other

Ask someone with a small side business whether they owe tax on it and you will usually get one of two confident answers. Either they are sure they owe nothing because the income is under the standard deduction, or they are sure they owe income tax on every dollar. Both are wrong, because there are two different taxes involved and they start at completely different points.

Income tax starts where the standard deduction runs out. Self-employment tax starts at 400 dollars of net earnings. The space between those two numbers is where side businesses get surprised.

Where income tax starts

The standard deduction for 2026 is 16,100 dollars for a single filer and 32,200 dollars for married filing jointly, per Revenue Procedure 2025-32. If your only income is a business profit of 16,000 dollars and you are single, your taxable income after the standard deduction is zero and you owe no federal income tax.

That part of the intuition is correct. It just answers the wrong question, because income tax is not the only tax a sole proprietor pays.

Where self-employment tax starts

Self-employment tax is the self-employed version of Social Security and Medicare. An employee pays 7.65 percent and the employer pays the other 7.65 percent. A sole proprietor is both, so the rate is 15.3 percent, applied to 92.35 percent of net profit. The 92.35 figure exists because employees do not pay FICA on the employer's share, so the base is reduced to mirror that.

The threshold is in section 1402(b)(2). If net earnings from self-employment are less than 400 dollars, there is no SE tax. Net earnings means the 92.35 percent figure, not raw profit, so the trigger in profit terms is 400 divided by 0.9235, which is about 433.14 dollars. At 433 dollars of profit you owe nothing. At 434 dollars you owe SE tax on the whole base.

That last part matters. The 400 dollar figure is a cliff, not an allowance. It is not that the first 400 dollars are exempt and everything above is taxed. It is that below the line there is no tax at all, and at the line the entire amount becomes taxable. At 434 dollars of profit the SE tax is about 61 dollars. One dollar less and it is zero.

The 400 dollar threshold has never been adjusted for inflation. It has been 400 dollars since the 1950s, which is why it is now so low that it catches almost anyone with any self-employment income at all.

The gap where people get caught

Put the two thresholds together and you get the range that catches side businesses. From about 434 dollars of profit up to 16,100 dollars for a single filer, you owe self-employment tax and no income tax.

Take a 10,000 dollar side business with no other income. Income tax is zero, because 10,000 is under the standard deduction. Self-employment tax is 15.3 percent of 9,235 dollars, which is 1,413 dollars. The person who was sure they owed nothing owes 1,413 dollars, and if they have not made estimated payments they may owe an underpayment penalty on top.

The half SE tax deduction softens this slightly for income tax purposes, since half of the 1,413 comes off adjusted gross income. But with no income tax owed anyway, the deduction is worth nothing in this range. The SE tax is the whole bill.

Add other income and the picture changes

The example above assumes the business is the only income. Most side businesses are not. Add a W-2 job, a spouse's salary, or investment income, and the standard deduction is already used up by the other income. Now every dollar of business profit is subject to income tax from the first dollar, on top of the SE tax.

So the same 10,000 dollar side business, run by someone with an 80,000 dollar salary, owes 1,413 dollars of SE tax plus income tax at whatever bracket the salary puts them in, which at 80,000 is 22 percent. Roughly 2,200 dollars of income tax on top, less the half SE tax deduction, for a total near 3,450 dollars. The rule of thumb that it is under the threshold is now wrong about both taxes.

The one thing other income does not change is the SE tax itself. SE tax is calculated on business net earnings alone. Your salary does not raise it, and it does not lower it, with one exception. The 0.9 percent Additional Medicare Tax applies once wages plus self-employment income together exceed 200,000 dollars for single filers or 250,000 for joint filers, and wages count toward that threshold.

The filing requirement follows the same line

The 400 dollar threshold does something else besides triggering the tax. It triggers a filing requirement. If your net earnings from self-employment are 400 dollars or more, you have to file a return and attach Schedule SE, even if you would otherwise be under the filing threshold entirely.

This catches people who assume they do not need to file because their total income is low. A student with 2,000 dollars of freelance income and nothing else is under every filing threshold for income tax purposes and still required to file because of Schedule SE.

What it means for setting money aside

The practical lesson is that the amount to set aside from side income is not zero just because you are under the standard deduction. In the range between 434 and 16,100 dollars of profit, it is 15.3 percent of 92.35 percent of profit, which is about 14.1 percent of profit. Above that, income tax layers on top and the percentage climbs.

It also means that below 434 dollars, setting anything aside is unnecessary. Software that charges SE tax on 100 dollars of profit is wrong, and it is wrong in the direction that costs trust, because it tells someone to reserve money against a liability of zero.

How ExactSplit handles it

ExactSplit applies the 400 dollar floor against net earnings, the 92.35 percent figure, as a cliff. Below it there is no SE tax, no half SE tax deduction, and a note explaining why. At or above it the full base is taxed. The Additional Medicare Tax on wages is calculated separately so a small business does not accidentally suppress a surtax that is actually owed on a large salary.

The result is that a 300 dollar side business is told it owes nothing, a 434 dollar side business is told it owes about 61 dollars, and a 10,000 dollar side business is told it owes about 1,413 dollars with the income tax part shown as zero. All three are correct, and all three are different from what the standard deduction rule of thumb would have said.