Self-Employment Tax
The tax that replaces FICA — and why it's the first thing every business owner must understand.
Educational content only — not tax advice. SE tax rules and wage bases change annually. Consult a qualified tax professional for your specific return.
Why This Matters
When someone becomes self-employed, they don't escape Social Security and Medicare taxes. They pay both halves.
An employee pays 7.65% FICA; their employer pays the matching 7.65%. The self-employed person is both employer and employee, so they pay 15.3% — called the self-employment (SE) tax.
For ABC Coffee Shop's owner with $120,000 in net business income, the SE tax alone is approximately $16,955 — before any income tax. Most new business owners are blindsided by this.
SE Tax Structure
SELF-EMPLOYMENT TAX BREAKDOWN
Social Security portion: 12.4% on net SE income (cap: $176,100 in 2025)
Medicare portion: 2.9% on ALL net SE income (no cap)
Total SE tax: 15.3% on net SE income
Additional Medicare Tax: 0.9% on SE income exceeding $200K/$250K MFJ
COMPARISON — $80,000
W-2 employee: Employee pays $6,120 + Employer pays $6,120 = $12,240 total
Self-employed: SE tax $12,240 — but they pay ALL of it themselves
Calculating SE Tax: The 0.9235 Multiplier
SE TAX CALCULATION (Schedule SE)
Step 1: Net profit from Schedule C
Step 2: Net profit × 0.9235 = SE tax base
Step 3: SE tax base × 15.3% = SE tax
ABC COFFEE SHOP OWNER ($120,000)
Step 1: $120,000
Step 2: $120,000 × 0.9235 = $110,820
Step 3: $110,820 × 15.3% = $16,955
Appears on Form 1040, Schedule 2, Line 4 — in ADDITION to income tax.
SE Tax Calculator
Net earnings × 92.35% × 15.3% = SE tax. Half is deductible as the employer-equivalent portion.
Step 1: Net profit = $120,000
Step 2: SE tax base = $120,000 × 0.9235 = $110,820
Step 3: SE tax = $110,820 × 15.3% = $16,955
SE Tax Owed
$16,955
Deductible Half
$8,478
Employer-equivalent
Tax Savings @ 22%
$1,865
Effective SE Rate
14.1%
Net cost: $15,090
2025 Social Security wage base: $176,100. Above that, only 2.9% Medicare applies to excess. Additional 0.9% Medicare tax may apply above $200K/$250K MFJ — not shown here.
The Deductible Half
SE TAX DEDUCTION
SE tax: $16,955
Deductible half: $8,478
This $8,478 reduces gross income BEFORE calculating AGI.
TAX SAVINGS (at 22% marginal rate): $8,478 × 22% = $1,865
NET SE TAX COST (after deduction): $16,955 − $1,865 = $15,090
SE Tax Across Income Levels
| Net SE Income | SE Base (×0.9235) | SE Tax (15.3%) | Deduction @22% | Net Cost |
|---|---|---|---|---|
| $30,000 | $27,705 | $4,239 | $466 | $3,773 |
| $60,000 | $55,410 | $8,478 | $933 | $7,545 |
| $100,000 | $92,350 | $14,130 | $1,554 | $12,575 |
| $120,000 | $110,820 | $16,955 | $1,865 | $15,090 |
| $176,100 | $162,628 | $24,882 | $2,737 | $22,145 |
| $200,000 | $184,700 | $27,193 | $2,991 | $24,202 |
KEY INSIGHT: SE tax is a flat ~14.1% effective rate on net income (before the deduction benefit) — it doesn't care about brackets.
The S-Corporation Strategy
Sole Proprietor ($150,000 net)
All profit subject to SE tax
~$21,214 SE tax
S-Corp ($60K salary + $90K distribution)
FICA on salary only: $9,180
~$12,034 saved/year
- Must pay a "reasonable salary" — IRS scrutinizes artificially low salaries
- Additional costs: payroll, Form 1120-S, K-1s, state requirements
- Generally worth considering above ~$60,000–$80,000 in net profit
- Reduces Social Security benefit credits (higher salary = more SS credits)
SE Tax and Retirement
SOCIAL SECURITY CREDITS (2025)
1 credit per $1,810 in SE income (or wages)
Maximum 4 credits per year
40 credits (10 years) required for SS retirement eligibility
S-corp salary reduction: $12K saved in SE tax today vs. reduced SS benefits in retirement — model both scenarios.
Key Tax Forms
SCHEDULE SE (Form 1040)
1a: Schedule C net profit → 2: × 0.9235 → 3: × 15.3% → 4: ÷ 2 (deductible half → Schedule 1)
Result → Schedule 2 (SE tax). Deductible half → Schedule 1 (reduces AGI).
Quarterly Estimated Taxes
ABC OWNER QUARTERLY PLANNING
SE tax projected: $16,955
Income tax projected: $13,000
Total projected tax: $29,955
Quarterly payment: $7,489
Due: April 15, June 15, September 15, January 15
Common Mistakes
Mistake 1: Not expecting SE tax
Many new owners budget only for income tax. The 15.3% SE tax is the bigger surprise in year one.
Mistake 2: Not using the 0.9235 multiplier
Applying 15.3% directly to net profit overstates SE tax. Correct base = net profit × 0.9235.
Mistake 3: Forgetting the deductible half
Automatically flows from Schedule SE to Schedule 1 — don't miss claiming it.
Mistake 4: S-corp salary too low
$1 salary + $150,000 distributions is a red flag. IRS requires reasonable compensation.
Mistake 5: Not including SE tax in quarterly payments
Underpayment penalty is based on total tax — income tax + SE tax.
Key Takeaway
Self-employment tax is 15.3% on 92.35% of net SE income — assessed regardless of income tax bracket. Half is deductible as an above-the-line deduction. The S-corporation structure can legally reduce SE tax by splitting income between salary (subject to FICA) and distributions (not subject to FICA), typically worthwhile above $60,000–$80,000 net profit. Always include SE tax in quarterly estimated payment planning.
Test Your Understanding
Question 1: ABC owner has $90,000 in net Schedule C profit. Approximate SE tax?
Question 2: The "deductible half of SE tax" is:
Ready to Practice?
Calculate SE tax, model the deductible half, and compare sole proprietor vs. S-corp strategies in the Practice Lab.
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Schedule C
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