Self-employment tax is the 15.3% federal tax imposed on net self-employment income under IRC Section 1401 — covering the employee and employer shares of Social Security (12.4%) and Medicare (2.9%) that a sole proprietor or independent contractor must pay themselves.
When you work as an employee, you pay 7.65% for Social Security and Medicare (FICA), and your employer matches that 7.65% — totaling 15.3%. Self-employed individuals (sole proprietors, independent contractors, single-member LLC owners, partners, S-corp owners on self-employment income) pay both the employee and employer shares themselves — the full 15.3% on net self-employment income, calculated on Schedule SE filed with Form 1040. The 15.3% breaks down under IRC §1401: 12.4% Social Security tax on net SE income up to the wage base ($168,600 for 2024; adjusted annually by SSA), plus 2.9% Medicare on all net SE income with no ceiling. Additionally, the Additional Medicare Tax of 0.9% applies to SE income above $200,000 (single) / $250,000 (married filing jointly) under the Affordable Care Act (IRC §1401(b)). Two deductions partially offset SE tax: (1) The deduction for one-half of SE tax — you deduct 50% of SE tax from gross income to arrive at net SE earnings, which reduces the base. (2) Self-employed health insurance premiums are deductible from income (not SE earnings) under IRC §162(l). Net self-employment earnings = gross SE income × 0.9235 (because you deduct the employer-equivalent half). SE tax = net SE earnings × 15.3% (up to wage base) + 2.9% (above wage base). The IRS SE tax worksheet is in IRS Publication 334 (irs.gov/publications/p334) and Schedule SE instructions (irs.gov/forms-pubs/about-schedule-se-form-1040).
The most significant strategy is S-corp election — paying yourself a reasonable W-2 salary (subject to FICA payroll taxes) and taking additional profit as S-corp distributions (not subject to SE tax). The QBI deduction (§199A) reduces income tax but not SE tax. Retirement plan contributions (SEP-IRA, Solo 401(k)) reduce income tax but also do not reduce SE tax. Consult a CPA to model the SE tax savings from S-corp election against the additional payroll compliance costs.
Yes. SE tax is separate from and in addition to federal and state income tax. A sole proprietor pays income tax on net Schedule C profit at ordinary income rates, plus SE tax at 15.3% on the same income (with minor adjustments). The deduction for one-half of SE tax reduces adjusted gross income, partially mitigating the double-tax effect, but SE tax still adds significantly to the total tax burden for self-employed individuals vs. employees.
1099-NEC income (nonemployee compensation for services) is subject to SE tax when it constitutes a trade or business. Passive income reported on 1099-MISC (rents, royalties) generally is NOT subject to SE tax — it's reported on Schedule E (rental income) or Schedule E Supplemental (royalties and pass-through income) unless you're in the business of renting property or authoring works professionally. Review IRS guidance at irs.gov/taxtopics/tc554.