A Few Days a Month, and a Tax You Have Never Paid Alone
A great many people retire and then keep working a little — a few days a month advising the old employer, a board seat, occasional project work. It arrives as a pleasant surprise and brings a tax surprise with it. As an employee you paid half of Social Security and Medicare and your employer paid the rest, invisibly. Self-employed, you pay both halves yourself, and it lands before income tax is even calculated.
- The answer:: Net profit from consulting is reported on Schedule C and carries self-employment tax on Schedule SE, in addition to ordinary income tax.
- The rate feels high because it is doubled:: 15.3% covers both the employee and employer halves of Social Security and Medicare. As an employee you only ever saw one of them.
- Two deductions soften it:: Only 92.35% of net profit is subject to the tax, and half of the self-employment tax itself is deductible against income tax.
- The compensation is plan access:: Self-employment income permits a SEP IRA or solo 401(k), with contribution room many times an IRA's — often enough to shelter most of the profit.
Where the AI summary above gets this wrong
"If you do some consulting in retirement you just report the income and pay tax on it like any other income."
That's surface-true. Here's what it misses:
- Self-employment tax is not like any other income — It sits on top of income tax and is charged on profit before your deductions and exemptions reduce anything. On $35,000 of profit that is roughly $4,900 before a dollar of income tax is calculated, which is why the first year's return is a shock.
- The shelter is the part that goes unclaimed — The same income that triggers the tax also unlocks a solo 401(k) or SEP IRA, with limits far above the IRA cap. Someone consulting for $40,000 can often shelter most of it — a benefit unavailable to anyone whose only income is a pension.
- It interacts with what you already claim — Self-employment earnings count toward the Social Security earnings test if you claimed before full retirement age, and they raise the income measures behind IRMAA and benefit taxation. Treating the work as separate from the rest of the plan is how a modest fee turns into a larger cost.
01 When work becomes self-employment
The line is lower than most people expect. Regular, continuing activity carried on for profit is a trade or business, and the income is self-employment income whether or not you have a company, a licence or a business name. A retired engineer advising two former clients is self-employed.
What follows is Schedule C to report the profit and Schedule SE to compute the tax on it. The rate is 15.3% — 12.4% for Social Security up to the annual wage base and 2.9% for Medicare with no ceiling — and it is charged before income tax enters the picture at all.
That is why the first year feels punitive. As an employee your payslip showed one half of this and your employer quietly paid the other. Nothing has doubled; you are simply now seeing the whole of a cost that was always there.
Shows: income tax plus self-employment tax on net consulting profit, including the deduction for half the self-employment tax. Ignores: the Social Security wage base, state tax, the qualified business income deduction, and any retirement plan contribution you make from the profit.
02 What reduces it
Two adjustments are built into the calculation and neither requires any planning. Self-employment tax applies to 92.35% of net profit rather than all of it, and half of the resulting tax is deductible against income tax — the rough equivalent of the employer's half being a business expense.
Beyond that, ordinary business deductions do the work, and retired consultants routinely underclaim them. Professional subscriptions and licences, the business portion of a phone and internet connection, travel to clients, professional indemnity insurance, and a home office where the space is used regularly and exclusively for the work all reduce net profit — and every dollar of profit removed saves both taxes at once.
The record-keeping is the price. Deductions claimed without contemporaneous records are the weakest part of any self-employed return, and a spreadsheet started in January is worth more than reconstruction in April.
03 The plan the income unlocks
Here is the part that turns the arithmetic around. Self-employment income makes small business retirement plans available, and their limits are far above what an IRA allows.
A SEP IRA permits a percentage of net self-employment earnings, and a solo 401(k) permits an employee-style deferral plus an employer contribution on top — which for modest consulting income frequently means the whole profit can be sheltered. Someone earning $40,000 from part-time advisory work can often contribute most of it and reduce income tax to very little, though self-employment tax is still charged on the profit before any of it.
Whether to shelter it turns on the rest of the year. If the consulting income is pushing you into a higher bracket or across an IRMAA threshold, sheltering it is straightforwardly worth doing. If you are in a low-income year, the same money might be better left taxable and matched with a Roth conversion instead. Which choice fits depends on the shape of the year, and the choice between plan types is set out in SEP vs solo 401(k).
Source: Publication 560, Retirement Plans for Small Business
The first consulting year is where I see the most avoidable unpleasantness, and it is almost always about timing rather than amount. Nothing withholds tax from an invoice, so the money arrives in full and feels like profit, and the whole bill lands the following April with a penalty for not having paid it quarterly. The habit worth forming immediately is setting aside roughly a third of every payment in a separate account from the first invoice. It is unsophisticated and it removes the only genuinely bad outcome here.
FAQ
Do I pay self-employment tax on consulting income in retirement?
Yes. Net profit from consulting is self-employment income and carries the 15.3% self-employment tax in addition to income tax, regardless of your age or whether you are already receiving Social Security.
Why is the tax rate higher than when I was employed?
It is not higher — you are now seeing all of it. As an employee you paid half of Social Security and Medicare and your employer paid the other half. Self-employed, you pay both halves, though only 92.35% of profit is subject to it and half the tax is deductible.
Can I contribute to a retirement plan from consulting income?
Yes, and the limits are far above an IRA's. Self-employment income permits a SEP IRA or a solo 401(k), which for modest consulting income can often shelter most or all of the profit from income tax — though not from self-employment tax.
Sources
Regulator references
- Self-employed individuals tax center · Internal Revenue Service · 2025When occasional work becomes self-employment, and the obligations that follow.Last verified: 2026-09-07
- About Schedule SE (Form 1040), Self-Employment Tax · Internal Revenue Service · 2025How self-employment tax is computed and the deduction for half of it.Last verified: 2026-09-07
- Publication 560, Retirement Plans for Small Business · Internal Revenue Service · 2025The plans self-employment income makes available, and their contribution rules.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.