What is Self-Employment Tax?
Self-employment tax is the Social Security and Medicare tax paid by people who work for themselves, calculated on net earnings from self-employment.
Employees and employers split Social Security and Medicare taxes through payroll. Self-employed people pay both halves themselves through self-employment tax, calculated on Schedule SE and paid with their individual return.
Who pays it
Generally, sole proprietors, independent contractors and members of partnerships or LLCs taxed as partnerships who have net earnings from self-employment above a small threshold. The IRS explains the rules on its self-employment tax page.
How it is calculated
Self-employment tax is figured on net earnings from self-employment, generally net profit from Schedule C or partnership self-employment income, with an adjustment that reflects the employer-equivalent portion. The Social Security part applies up to an annual wage base; the Medicare part applies to all net earnings, with an additional Medicare tax above certain income levels.
Deduction for half
Self-employed individuals can generally deduct the employer-equivalent portion of self-employment tax when figuring adjusted gross income. This deduction reduces income tax, not self-employment tax itself.
Paying during the year
Self-employment tax is not withheld, so most self-employed people make quarterly estimated payments covering both income tax and self-employment tax. See estimated tax safe harbor.
Why bookkeeping matters
Every legitimate business expense reduces net profit and therefore both income tax and self-employment tax. Complete records of expenses, mileage and home office use make a direct difference. See Schedule C for sole proprietors and FICA tax for the employee equivalent.
Related terms
- FICA Tax: FICA tax is the Social Security and Medicare tax paid on wages, shared between employers and employees.
- Adjusted Gross Income (AGI): Adjusted gross income is total income minus certain adjustments, a key figure on an individual tax return.
- Estimated Tax Safe Harbor: The estimated tax safe harbor rules let taxpayers avoid underpayment penalties by paying a set share of current or prior-year tax.
Browse more definitions in the small business glossary.
FAQs
Frequently asked questions
Do LLC owners pay self-employment tax?
Members of LLCs taxed as sole proprietorships or partnerships generally do on their share of business earnings. LLCs electing S corporation status are treated differently.
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