Finance term
Self-Employment Tax (IRC §1401)
Also known as: SE tax, self-employment tax rate, Schedule SE, SECA tax
Definition
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.
Detailed explanation
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).
◈ Worked example
- Sole proprietor with $100,000 net Schedule C income: Net SE earnings = $100,000 × 0.9235 = $92,350. SE tax = $92,350 × 15.3% = $14,130. Deduction for half of SE tax = $7,065 (reduces AGI). Effective additional tax burden vs. employee: ~$7,065 (employer half).
- S-corp owner on $80,000 W-2 salary + $120,000 distribution: SE tax on W-2 salary is collected via payroll withholding. The $120,000 distribution is NOT subject to SE tax — saving approximately $10,975 in SE tax compared to reporting the full $200,000 as sole proprietor income.
- Additional Medicare Tax example: self-employed individual with $280,000 net SE income pays: 15.3% on first $168,600, 2.9% on next $111,400, plus 0.9% Additional Medicare Tax on $80,000 (the amount above $200,000 threshold). Total Medicare rate on income above $200,000: 3.8%.
Common questions
The most-asked questions about Self-Employment Tax (IRC §1401) — answered straightforwardly.
How do I reduce self-employment tax legally? +
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.
Is SE tax on top of income tax? +
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.
Does SE tax apply to all 1099 income? +
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.
Further reading
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