Self-Employment Tax

Self-employment tax is the equivalent of FICA for self-employed individuals: they pay both the employer and employee portions. The base is 92.35% of net earnings from self-employment. So a $100k Schedule C profit runs through the SE tax calc on $92,350 × 15.3% = $14,130 of SE tax, before regular income tax touches the money.

Schedule SE on the personal return calculates the tax. Half of SE tax is deductible as an above-the-line adjustment — that half deduction reduces AGI (and thus AGI-dependent items like QBI phase-outs, IRA deductibility, and NIIT) but doesn't reduce the SE tax itself. Modeling both effects correctly requires an integrated projection.

The S-corp election is the single biggest SE tax planning lever. A sole prop with $200k profit pays SE tax on all of it (~$28k). The same business as an S-corp paying $80k reasonable wages and taking $120k as a distribution pays SE / payroll tax on just the $80k (~$12k), saving ~$16k per year. The exact optimum depends on reasonable-comp defensibility, state overlay, and QBI wage-base interactions — often not the same as the minimum defensible comp.

For partners in a partnership, the general rule is that a general partner's distributive share IS subject to SE tax; a limited partner's distributive share generally isn't. LLC members occupy a gray zone that the IRS and Tax Court have litigated repeatedly. Getting this wrong can produce material understatements — the professional-services LLC that treats manager-members as limited partners without an operating-agreement basis is the most common exam target.

Retirement-plan design interacts with SE tax. Solo 401(k) and SEP-IRA contributions are deductible for income tax but do NOT reduce SE tax. This makes the pre-tax retirement contribution less powerful for a Schedule C filer than for a W-2 employee — the 15.3% doesn't come back either way. Cash-balance and defined-benefit plans provide a much larger deduction but don't change the SE-tax math either.