Tax
Definition
Self-employment tax is a 15.3% tax on net self-employment income that covers Social Security (12.4%) and Medicare (2.9%) contributions — the combined employer and employee portions that would normally be split with an employer.
When you work as an employee, your employer pays half of FICA taxes (7.65%) and withholds the other half from your paycheck. When you're self-employed — as a sole proprietor, independent contractor, or single-member LLC — you pay both halves, totaling 15.3% on the first $168,600 of net earnings (2024 Social Security wage base), plus 2.9% Medicare tax on all earnings above that. An additional 0.9% Medicare surtax applies to self-employment income exceeding $200,000 ($250,000 married filing jointly). Self-employment tax is calculated on Schedule SE and is separate from income tax — you owe both. However, you can deduct the employer-equivalent portion (half of SE tax) from your adjusted gross income on Form 1040, reducing your income tax. The most common strategy to reduce self-employment tax is electing S-corp status: you pay yourself a 'reasonable salary' (subject to FICA) and take remaining profits as distributions (not subject to SE tax). This strategy works when profits significantly exceed a reasonable salary — typically above $40K–$60K in annual profit. The IRS scrutinizes unreasonably low salaries in S-corps.
Self-employment tax is often the largest single tax burden for freelancers and small business owners — and it's the tax that surprises people most in their first year of self-employment. Many new independent contractors budget only for income tax and are shocked by an additional 15.3% bill. A tax advisor can help you estimate quarterly payments accurately, determine whether an S-corp election makes sense for your income level, and identify deductions that reduce your SE tax base.