What is self-employment tax and how is it calculated?

Self-employment tax is the mechanism by which self-employed individuals pay both the employee and employer portions of Social Security and Medicare taxes. When a person works as a W-2 employee, the employer pays half of these taxes (7.65%) and withholds the other half from the employee's paycheck. Self-employed individuals — sole proprietors, single-member LLC owners, and others with net self-employment income — owe both halves, for a combined rate of 15.3%.

The 15.3% rate applies to net self-employment income up to the Social Security wage base, which is adjusted annually for inflation. Above the wage base, the Social Security portion (12.4%) drops off, leaving only the 2.9% Medicare portion. Additionally, the Additional Medicare Tax imposes an extra 0.9% on self-employment income above certain thresholds — $200,000 for single filers and $250,000 for married filing jointly. This surtax is calculated on Form 8959 and reported on Form 1040.

Self-employment tax is calculated on IRS Schedule SE, which starts with net profit from Schedule C and applies a 92.35% multiplier before computing the tax. This adjustment reflects the fact that self-employed individuals can deduct the employer-equivalent portion of SE tax (50% of total SE tax) as an above-the-line deduction on Form 1040, which reduces adjusted gross income. The SE tax itself is not reduced by this deduction — the deduction only affects income tax, not SE tax. IRS Publication 334 provides the full framework.

This is general tax information, not tax advice. Your situation may differ; consult a licensed CPA before making tax decisions.