Self-Employment Tax

The self-employment (SE) tax is, as the name suggests, a tax on self-employment income, consisting of Social Security and Medicare taxes, also called FICA (Federal Insurance Contributions Act) taxes. The employment tax, often called the payroll tax, is also assessed on employees. The employer pays 6.2% of the Social Security (SS) tax and 1.45% of the Medicare tax on behalf of the employee; the employee pays the remaining part. Since, by definition, self-employed people do not have employers, they must pay the full amount of the tax. However, just as employers can deduct their share of the employment tax paid to their employees, the self-employed are permitted to deduct that portion as well. Additionally, they are permitted to deduct 50% of the SE tax paid as an adjustment for gross income on Form 1040.

The self-employment tax is calculated on Schedule SE, Self-Employment Tax, which must be filed by every taxpayer if self-employment income exceeds $433.13 (92.35% × income ≥ $400), even if they are already retired and collecting Social Security and are enrolled in Medicare. If the taxpayer has more than 1 business, then the income is netted among all businesses and listed on Schedule SE.

Schedule SE consists of 2 major parts: Short Schedule SE and Long Schedule SE. The Short Schedule can be used by taxpayers whose total earnings are within than the Social Security contribution and benefit base (hereafter: SS wage base) and who only earned wages from employers who withheld the SE tax. Most other taxpayers must use the Long Schedule SE.

Self-employment tax must be paid on net business income or income from a partnership, limited liability company, or S corporation. If the taxpayer has more than 1 business, then self-employment income is paid on the net earnings from all businesses. So losses in 1 business can be offset by the income of another. Although business expenses reduce net earnings, and, therefore, self-employment tax, other deductions on Form 1040, such as contributions to retirement plans, and most tax credits do not reduce self-employment tax.

The Social Security Administration calls the part of wages subject to the Social Security tax the contribution and benefit base. However, for purposes of the self-employment tax, I make the distinction between the contribution and benefit base, which I simply call the SS wage base, and the self-employment tax wage base. The SET wage base is about 8% (≈ 1/.9235 − 1) higher than the SS wage base, because the limit to the SS wage base only applies after subtracting the 7.65% employer contribution, meaning that the self-employed only pay the maximum Social Security tax when they earn at least the SE wage base, while the SS wage base, which is the maximum wage earned by an employee subject to the SS tax, is about 8% lower.

The self-employment tax rate is 15.3%: 12.4% of that part goes to Social Security and 2.9% for Medicare. This rate applies to 92.35% of self-employment income within the SS wage base:

Social Security Contribution and Benefit Base
SE Tax
Wage Base		 SS Wage
Base
2024 $182,566 $168,600
2023 $173,470 $160,200
2022 $159,177 $147,000
2021 $154,629 $142,800
2020 $149,107 $137,700
2019 $143,909 $132,900
2018 $139,036 $128,400
2017 $137,737 $127,200
2016 $128,316 $118,500
2015 $128,316 $118,500
2014 $126,692 $117,000
2013 $123,119 $113,700
2012 $119,220 $110,100
2011 $115,647 $106,800
Source: Contribution and Benefit Base

The 92.35% rate is derived from the fact that self-employed taxpayers can deduct the employer's portion of the tax, which is 7.65% (100% − 7.65% = 92.35%). The Medicare tax applies to 92.35% of all earned income. Note that since employees cannot deduct the employer portion of the employment taxes, the maximum Social Security tax paid by employees will be those who earn at least the SS wage base.

Self-Employment Taxable Income = Net Business Income × .9235

Self-Employment Tax = Self-Employment Income × .153

Since multiplication is associative — meaning that the order of multiplication does not matter, e.g. (a × b) × c = a × (b × c) — the actual self-employment tax rate can be found by the following equation:

Actual Self-Employment Tax Rate = .9235 × .153 = 0.1412955 = 14.12955% ≈ 14.13%

Example 1: Why the Self-Employment Tax Is Only about 14.13% of Income

People who earn more than the SE wage base only have to pay the Medicare tax on the additional income. Although the Medicare tax rate for the self-employed is nominally 2.9%, the actual rate is lower because, like the SS tax, it only applies to 92.35% of self-employment income:

Actual Self-Employment Medicare Tax Rate = .9235 × .029 = .0267815 ≈ 2.68%

The self-employed taxpayer can deduct 1/2 of the tax paid, which is equivalent to the employer's portion.

Example 2: The taxpayer in Example 1 can deduct $14,129.55 × .5 = $7,064.78

Self-employment tax is additional to the ordinary income tax on earned income. It is also a regressive tax because it places a greater tax burden on lower-income taxpayers. Only refundable tax credits — earned income credit, additional child tax credit, the adoption credit, the health insurance premium tax credit, and 40% of the American Opportunity credit — can lower the self-employment tax liability. Since most tax credits are nonrefundable, they cannot be applied to the self-employment tax.

An additional Medicare tax of 0.9% also applies to taxpayers with incomes exceeding $200,000, or $250,000 for a joint return ($125,000 for taxpayers filing separately). The 2.9% rate applies to all earned income; the 0.9% applies to income above the threshold amount. Only the employee pays the 0.9% tax — there is no employer contribution — so the self-employed also only pay the 0.9%. For these taxpayers, investment income is also subject to an additional Medicare surtax of 3.8%. Take note, however, that no portion of either the additional Medicare tax or the 3.8% Medicare surcharge can be deducted against gross income. The 1/2 SE tax deduction only applies to the 12.4% Social Security tax and the 2.9% Medicare tax.

Married couples filing jointly must each file Schedule SE for income that they earn from their business or respective shares of the business. Also, business income is not treated as community property, so the spouse who earns the money must pay the tax.

Investment income is not subject to self-employment tax. Limited partners do not have to pay self-employment tax, but general partners do, since they are active in the business. Partners and limited liability company members owe self-employment tax for compensation received for services rendered, but if they are not active in the business, then it is considered investment income not subject to self-employment tax.

The self-employment tax also applies to foreign earned income. Although tax law allows the deduction or exclusion of foreign income that is taxed in the foreign country from ordinary income taxes, it does not apply to the self-employment tax. Since the maximum foreign earned income that can be excluded is less than the SS wage base, the entire amount is subject to self-employment tax.

How Self-Employment Tax Is Calculated on Schedule SE

SE Taxable Income = SE Income × 92.35%
If SE Taxable Income ≤ SS Wage Base then SE Tax = SE Taxable Income × 92.35% × 15.3%
If SE Taxable Income > SS Wage Base then SE Tax = SS Tax + Medicare Tax
= SS Wage Base × 12.4% + SE Taxable Income × 2.9%

How Self-Employment Tax Is Calculated If the Taxpayer Has Both Wages and Self-Employment Income

By law, the employer must withhold employment taxes from the wages paid to employees. Therefore, if a taxpayer has both wages and self-employment income, then the amount due on the self-employment income can be determined by the following procedure:

  1. If Wages + Self-Employment Income ≤ Social Security Wage Base, then
    1. Self-Employment Tax = Self-Employment Income × 92.35% × 15.3%.
  2. Else If Wages > Social Security Wage Base, then
    1. Self-Employment Tax
      1. = Medicare Tax on Self-Employment Income
      2. = Self-Employment Income × 92.35% × 2 .9%
    2. Else Self-Employment Tax
      1. = Lesser of [(Social Security Wage Base − Wages) or SE Income × 92.35%] × SS Tax Rate (12.4%) + Total SE Income × 92.35% × 2.9%
Example: Calculating Self-Employment Tax and Deduction When Receiving Both Wages and Self-Employment Income
2024 Social Security Wage Base $168,600
Wages $140,000
Self-Employment Income $80,000
Self-Employment Income Subject to Self-Employment Tax $73,880 = Self-Employment Income × 92.35%
Social Security Tax Rate 12.4%
Medicare Tax Rate 2.9%
Social Security Taxable Self-Employment Income $28,600 = Lesser of (Social Security Wage Base − Wages) or Self-Employment Taxable Income
Social Security Tax on Income Below Base $3,546 = Social Security Taxable Self-Employment Income × Social Security Tax Rate
Medicare Tax on Self-Employment Income $2,143 = Self-Employment Taxable Income × Medicare Tax Rate
Total Self-Employment Tax $5,689
Self-Employment Tax Deduction from Gross Income on Form 1040
Self-Employment Tax Deduction from Gross Income $2,844 = Total Self-Employment Tax × 50%

Historical Notes

In 2013, an Additional Medicare Tax of 0.9% was added to those taxpayers with incomes above the following threshold amounts:

Employers are required to withhold the tax for any payments in excess of $200,000 to an employee during the calendar year, regardless of the filing status of the employee.