Self-employment tax is the 15.3% Social Security and Medicare tax that self-employed individuals pay on net earnings. It covers both the employee and employer share of FICA. You can deduct half of it from your adjusted gross income when you file.
When you work for an employer, your FICA taxes — Social Security (6.2%) and Medicare (1.45%) — are split evenly between you and your employer. When you're self-employed, you are both the employee and the employer, so you pay both halves: 12.4% for Social Security and 2.9% for Medicare, for a combined self-employment (SE) tax rate of 15.3% on net self-employment earnings. This is calculated on IRS Schedule SE and flows onto your Form 1040.
SE tax applies to net self-employment earnings — generally, your business revenue minus ordinary and necessary business expenses. Net SE income of $400 or more in a year triggers the requirement to file Schedule SE and pay SE tax. The Social Security portion applies only up to an annual wage base (which adjusts each year); the Medicare portion applies to all net SE income, with an additional 0.9% on earnings above $200,000 for single filers ($250,000 for married filing jointly) under the Additional Medicare Tax.
The IRS allows you to deduct half of your SE tax as an adjustment to income on Form 1040 (Schedule 1). This deduction reduces your adjusted gross income, which in turn lowers your regular income tax — even if you don't itemize deductions. It exists because employed workers pay only their half of FICA; allowing self-employed workers to deduct the employer-equivalent half creates parity. See IRS Publication 334 (Tax Guide for Small Business) for full details.
Because no employer withholds SE tax from your pay, self-employed individuals typically must make quarterly estimated tax payments that cover both their regular income tax and their SE tax liability. Under-paying can trigger an IRS underpayment penalty. A tax professional can help you calculate the right quarterly payment to stay current throughout the year.