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Self-Employment Tax Guide

Self-employment tax of 15.3% (12.4% for Social Security plus 2.9% for Medicare) applies to net earnings of $400 or more from self-employment. Unlike W-2 employees, self-employed workers pay both the employee and employer portions.

When you work for an employer, they pay half of your Social Security and Medicare taxes (7.65%) and you pay the other half through payroll withholding. When you're self-employed, you're responsible for the full 15.3%. The Social Security portion (12.4%) applies only to earnings up to the Social Security wage base ($176,100 in 2025), while the Medicare portion (2.9%) applies to all net earnings with an additional 0.9% surtax on earnings above $200,000 ($250,000 married filing jointly).

For example, a freelance web developer earning $80,000 in net profit after deductions would owe $80,000 × 92.35% (the taxable portion) = $73,880 × 15.3% = $11,303 in self-employment tax. On top of that, they'd owe income tax on the business profit. However, they can deduct half the self-employment tax ($5,652) as an above-the-line deduction on Form 1040, reducing their AGI.

The key to reducing self-employment tax is to minimize net earnings through legitimate business deductions: home office deduction (simplified method: $5 per sq ft, up to 300 sq ft), health insurance premiums (deducted above-the-line), retirement plan contributions (SEP IRA, Solo 401(k)), and business expenses (equipment, software, travel, internet).

SEP IRA and Solo 401(k) Strategies

A SEP IRA allows contributions up to the lesser of $70,000 (2025) or 25% of compensation. A Solo 401(k) allows up to $23,500 in employee deferrals plus 25% of compensation as employer contributions, total up to $70,000. For a sole proprietor earning $100,000, a $23,500 employee deferral plus $19,000 employer contribution = $42,500 in tax-deferred savings, reducing both income tax and self-employment tax.

FAQs

Can I avoid self-employment tax by incorporating?

Forming an S corporation can reduce self-employment tax if you take a reasonable salary (subject to FICA) and the remaining profit as distributions (not subject to self-employment tax). However, S corp compliance costs (payroll processing, tax filings, state fees) often outweigh the savings until net income exceeds $50,000-$60,000.

What is Schedule SE?

Schedule SE (Form 1040) is used to calculate self-employment tax. It accounts for the 92.35% adjustment (the employer-portion deduction built into the calculation) and the 15.3% rate. The form also tracks whether you've reached the Social Security wage base. If you also have W-2 wages, the calculations coordinate to ensure you don't overpay.

Do I pay self-employment tax on rental income?

Generally no, unless you're a real estate professional or provide substantial services (like a hotel). Passive rental income from real estate is not subject to self-employment tax. However, if you're in the business of real estate development, flipping houses, or providing rental services (cleaning, concierge), the IRS may classify it as active business income subject to SE tax.

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