Self-Employment Tax
Self-employment tax is the Social Security and Medicare tax (totaling 15.3%) that self-employed individuals pay on their net business earnings, covering both the employer and employee portions.
When you work for an employer, Social Security and Medicare taxes are split — you pay 7.65% and your employer pays 7.65%. When you're self-employed, you pay both halves, totaling 15.3% on your net self-employment income.
The 15.3% breaks down as follows: 12.4% for Social Security (on income up to $168,600 in 2025) and 2.9% for Medicare (on all income, with an additional 0.9% on income over $200,000 for single filers).
Self-employment tax is calculated on Schedule SE and is in addition to your regular income tax. The silver lining is that you can deduct the employer-equivalent portion (7.65%) as an above-the-line deduction on your Form 1040, reducing your adjusted gross income.
This is one of the primary taxes that business owners can reduce through proper entity structuring. An S-Corp election allows you to pay self-employment tax only on your salary, not on the full business profit. The potential savings can be substantial once net income exceeds $60,000.
Self-employment tax applies to sole proprietors, single-member LLC owners (taxed as sole proprietors), and general partners. It does not apply to S-Corp distributions or limited partner income.
Practical Example
David earns $150,000 in net self-employment income. His self-employment tax is $21,195 (15.3% of 92.35% of $150,000). If he elected S-Corp status with a $70,000 reasonable salary, his payroll taxes would be approximately $10,710, saving him about $10,485 per year.