Self-Employment Tax: Rates, Calculation, and How to Reduce It

Working for yourself brings a charge that employees only ever see half of, because the other half was paid by an employer nobody thought about.

That is the shock of a first self-employed year. It is not the rate, it is that both halves now fall on one person and arrive through the return rather than quietly off a payslip.

This covers what the charge is, who pays it, how it is calculated, how the cap on one part of it works, the additional charge that applies to higher earners, and the legitimate ways to reduce it.

What Is Self-Employment Tax?

When you are an employee, your employer withholds half of your Social Security and Medicare taxes (FICA) and pays the other half themselves. When you are self-employed, you pay both halves yourself, that is self-employment (SE) tax.

• Social Security: 12.4% (6.2% employee share + 6.2% employer share)
• Medicare: 2.9% (1.45% + 1.45%)
• Total SE tax rate: 15.3%
• Applied to net self-employment income (after business expenses)

Who Pays Self-Employment Tax?

• Sole proprietors (Schedule C filers)
• Partners in a general partnership
• Members of an LLC (if not electing S-corp status)
• Independent contractors and gig workers
• If net SE income is $400 or more, you must file Schedule SE

How SE Tax Is Calculated

The IRS allows a small reduction before applying the SE tax rate, because the employer share of FICA is deductible for regular income tax purposes.

• Calculate net SE income (gross business income minus business expenses)
• Multiply net SE income by 92.35% (this is 100% minus 7.65%, the employer-portion equivalent)
• Apply the 15.3% SE tax rate to the result
• Deduct half of SE tax from gross income (above-the-line deduction on Form 1040)

Example Calculation

Social Security Wage Base Limit

The 12.4% Social Security portion of SE tax only applies up to a wage base limit. The Medicare portion (2.9%) has no cap.

• 2025 SS wage base: $176,100
• SS SE tax: 12.4% on first $176,100 of SE income
• Medicare SE tax: 2.9% on all SE income, no cap

Additional Medicare Tax

High-earning self-employed individuals pay an additional 0.9% Medicare tax on SE income above:

• $200,000 for single filers
• $250,000 for married filing jointly
• $125,000 for married filing separately
• This additional tax is NOT split with an employer, it is entirely the self-employed person's responsibility
• Claimed on Form 8959

How to Reduce Your Self-Employment Tax

Strategy 1: S-Corp Election

An LLC or corporation can elect S-corp tax status. The owner-employee pays themselves a 'reasonable salary,' on which FICA is paid normally. Remaining profits are distributed as dividends, which are NOT subject to SE tax or FICA.

• Example: $150k net profit. Pay $80k salary (subject to FICA). Take $70k as distribution (no SE/FICA tax).
• Savings depend on how reasonable the salary must be vs. total profits
• Must set up payroll, file quarterly payroll returns, and run two sets of books
• Generally worthwhile when net income exceeds $40,000-$60,000/year

Pro Tip: The IRS scrutinizes S-corp salaries. 'Reasonable compensation' is a facts-and-circumstances test. Too low a salary is a red flag.

Strategy 2: Retirement Contributions

Contributions to a SEP-IRA, Solo 401(k), or SIMPLE IRA reduce net self-employment income, which in turn reduces SE tax.

• SEP-IRA: contribute up to 25% of net SE income (max $69,000 for 2024)
• Solo 401(k): contribute up to $23,500 as employee + 25% of net SE income as employer (max $69,000)
• Every dollar contributed reduces both income tax and SE tax

Strategy 3: Maximize Business Deductions

Reducing net SE income reduces SE tax dollar-for-dollar (at 15.3%). Every legitimate business expense reduces both income tax and SE tax.

• Home office deduction (regular and exclusive use)
• Vehicle mileage
• Health insurance premiums (100% deductible above-the-line)
• Professional services (accountants, attorneys)
• Education and professional development

Strategy 4: Above-the-Line Deductions

• Half of SE tax: deductible from gross income (reduces income tax but not SE tax)
• Health insurance premiums for self-employed: 100% deductible (reduces income tax but not SE tax)
• These do not reduce SE tax itself, but they reduce your overall tax bill

Frequently Asked Questions

Written by

Anu Gupta, CA, EA, B.Tech

Anu works with US businesses on tax and entity questions at Profitjets, from choosing a structure to the filings that follow it. She writes about the decisions owners make once and then live with for years. Connect on LinkedIn