Self-Employment Tax

Self-employment (SE) tax ensures that self-employed individuals contribute to Social Security and Medicare, just as employees do through FICA withholding. However, because self-employed individuals act as both employer and employee, they pay both portions of the tax.

Self-Employment Tax Components

The 15.3% Rate

Self-employment tax consists of two components:

Key Points:

• The 12.4% Social Security portion applies only to net SE income up to the 2025 wage base of $176,100
• The 2.9% Medicare portion applies to all net SE income with no cap
• Combined, the maximum Social Security tax for 2025 is $21,836.40 ($176,100 x 12.4%)

The 92.35% Calculation

Self-employment tax is not calculated on 100% of net earnings. Instead, it applies to 92.35% of net self-employment income.

Why 92.35%?

This adjustment mirrors the treatment of employees:

• Employees only pay FICA on their wages (not on the employer's portion of FICA)
• Self-employed individuals get a similar benefit: 100% - 7.65% = 92.35%
• This effectively reduces the tax base to account for the "employer portion"

Net Self-Employment Income Formula

Net SE Income = Gross Self-Employment Income - Business Expenses
SE Tax Base = Net SE Income x 92.35% (0.9235)

Complete SE Tax Calculation

Step-by-Step Process

Step 1: Calculate net self-employment income (Schedule C net profit for sole proprietors, or K-1 SE income for partners)

Step 2: Multiply by 92.35% to get the SE tax base

Step 3: Calculate Social Security portion:

• SE Tax Base x 12.4% (up to $176,100 wage base for 2025)

Step 4: Calculate Medicare portion:

• SE Tax Base x 2.9% (on all SE income)

Step 5: Add together for total SE tax

Calculation Example

Marcus operates a consulting business as a sole proprietor. His 2025 Schedule C shows net profit of $120,000.

High-Income Example (Exceeding Wage Base)

Jennifer is a self-employed attorney with $250,000 of net SE income in 2025.

Note: Social Security tax is calculated only on the wage base ($176,100), not the full SE tax base.

Additional Medicare Tax (0.9%)

High-income self-employed individuals owe an additional 0.9% Medicare tax on SE income exceeding threshold amounts.

2025 Additional Medicare Tax Thresholds

Calculation of Additional Medicare Tax

The additional 0.9% applies to net SE income (after the 92.35% adjustment) that exceeds the applicable threshold.

Example: Sarah, a single taxpayer, has $280,000 of net SE income.

Combined Medicare Rates

For self-employed individuals exceeding the threshold:

• Regular Medicare: 2.9%
• Additional Medicare: 0.9%
• Total Medicare: 3.8% on income above threshold

The 50% SE Tax Deduction

One of the most important tax benefits for self-employed individuals is the ability to deduct 50% of self-employment tax as an above-the-line deduction (for AGI).

Why 50%?

• Employers can deduct their portion of FICA as a business expense
• Self-employed individuals get equivalent treatment through this deduction
• The deduction reduces AGI, benefiting various income-based calculations

Where It Appears

• Form 1040, Schedule 1, Line 15: One-half of self-employment tax
• This is a "for AGI" deduction, available whether or not you itemize
• Reduces AGI and taxable income (but not the SE tax itself)

Deduction Example

Using Marcus's example above with $16,956 total SE tax:

• SE Tax Deduction = $16,956 x 50% = $8,478
• This $8,478 reduces Marcus's adjusted gross income

Important Distinction

• The 50% deduction does not reduce the SE tax you owe
• It only reduces your income tax liability by lowering AGI
• You still pay the full SE tax calculated

SE Tax Filing Requirements

Minimum Threshold

You must file Schedule SE and pay self-employment tax if:

• Net earnings from self-employment are $400 or more

Who Owes SE Tax?

S Corporation Strategy

One reason business owners elect S corporation status is to reduce SE tax:

• Shareholder-employees pay FICA only on reasonable salary
• Remaining profits distributed as dividends avoid SE tax
• IRS requires "reasonable compensation" to prevent abuse

Example: A business earns $150,000 profit. Compare the SE tax impact:

Note: This simplified example ignores the employer's share of FICA that the S corp would pay.

Quarterly Estimated Tax Payments

Self-employed individuals typically must make quarterly estimated tax payments to cover:

• Income tax liability
• Self-employment tax liability

Due Dates for 2025

Safe Harbor Rules

To avoid underpayment penalties:

• Pay 100% of prior year tax liability (110% if AGI > $150,000), OR
• Pay 90% of current year tax liability

Key Forms for Self-Employment Tax

Special Situations

Multiple Self-Employment Activities

If you have income from multiple self-employment activities:

• Combine all net SE income for SE tax calculation
• The $176,100 wage base applies to total combined income
• One Schedule SE covers all SE activities

Combination of Wages and SE Income

If you have both W-2 wages and SE income:

• W-2 wages count first toward the $176,100 Social Security wage base
• SE income is then taxed on any remaining wage base room
• May reduce or eliminate SS portion of SE tax

Example: Tom has $150,000 in W-2 wages and $50,000 net SE income in 2025.

• Wage base remaining: $176,100 - $150,000 = $26,100
• SE Tax Base: $50,000 x 92.35% = $46,175
• SS tax applies only to $26,100 of the SE tax base
• Medicare (2.9%) applies to the full $46,175