Self-Employment Tax
The Social Security and Medicare tax (15.3% combined) paid by self-employed taxpayers on their net earnings from self-employment.
Detailed Explanation
Self-employment tax is computed on Schedule SE: 12.4% Social Security on net earnings up to $176,100 (2025) plus 2.9% Medicare with no cap, totaling 15.3%. An additional 0.9% Medicare surtax applies to high earners. Half of self-employment tax is deductible above the line on Form 1040. Sole proprietors, partners, and single-member LLC owners pay self-employment tax on their net earnings; S-corp shareholders avoid SE tax on profit distributions but must take reasonable W-2 wages.
Key Points
- 15.3% total: 12.4% Social Security (capped at $176,100 of net earnings for 2025) plus 2.9% Medicare (no cap).
- Applied to 92.35% of net self-employment earnings, computed on Schedule SE.
- An extra 0.9% Additional Medicare Tax applies above $200,000 single / $250,000 MFJ.
- Half of SE tax is deductible above the line, reducing AGI.
- S-corp shareholders avoid SE tax on distributions but must pay a reasonable W-2 salary first.
Practical Example
A sole proprietor nets $100,000. SE tax is computed on $92,350 (92.35%): 15.3% equals about $14,130. Half of that, roughly $7,065, is deductible above the line. Electing S-corp status and paying a $60,000 reasonable salary would limit FICA to the salary, potentially saving several thousand dollars on the remaining $40,000 of profit.
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Learn about Individual Tax PreparationRelated Terms
Schedule C (Profit or Loss from Business)
The federal tax form filed with Form 1040 to report income and expenses of a sole proprietorship or single-member LLC treated as a disregarded entity.
Estimated Tax
Quarterly tax payments made by self-employed individuals, investors, and others whose income is not subject to sufficient withholding.
S Corporation
A pass-through tax election under Subchapter S of the Internal Revenue Code that avoids corporate double taxation while allowing shareholder-employees to reduce self-employment tax.
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