Tax
Self-Employment Tax: How It Works and How to Lower It
How the 15.3% self-employment tax is actually computed — the 92.35% adjustment, the Social Security wage-base cap, uncapped Medicare — plus the employer-half deduction, how an S-corp election changes the math, and quarterly estimates.
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What SE Tax Is and Who Pays It
- Self-employment tax is Social Security and Medicare for people without an employer withholding it: 15.3% total, split as 12.4% OASDI plus 2.9% Medicare.
- Who pays: sole proprietors (Schedule C), single-member LLC owners under default tax treatment, and general partners on their share of partnership ordinary income.
- It is computed on Schedule SE and owed on top of regular income tax — the two are separate calculations that both come out of the same profit.
- S-corp shareholders do not pay SE tax on distributions; they pay regular FICA on their W-2 salary instead. That distinction is the entire S-corp payroll-tax play.
- Landlord note: rental income is generally not subject to SE tax — this is a tax on active self-employment earnings.
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Educational content — not tax, legal, or accounting advice. Confirm with a CPA before acting.
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Frequently asked questions
Why do I only pay SE tax on 92.35% of my profit?
It mirrors how employees are taxed. An employee never pays FICA on the employer's share of FICA — that employer half is not part of taxable wages. The 92.35% adjustment (100% minus half of 15.3%) gives self-employed people the equivalent treatment, so Schedule SE applies the 15.3% rate to 92.35% of net self-employment profit rather than the full amount.
Is self-employment tax on top of regular income tax?
Yes. SE tax and income tax are separate calculations on the same profit, and you owe both. That is the classic first-year freelancer surprise: budgeting for income tax and forgetting the additional 15.3%. Both taxes flow into your quarterly estimated payments, so a realistic set-aside percentage on every dollar received needs to cover the combined bill.
Do I pay Social Security tax on all of my self-employment income?
No — the 12.4% OASDI portion stops at the Social Security wage base, which is $184,500 in 2026 and adjusted annually. If you also earn W-2 wages, those absorb the wage base first, shrinking the OASDI owed on your SE earnings. The 2.9% Medicare portion, by contrast, has no cap, and a 0.9% additional Medicare surtax applies above statutory thresholds.
Does electing S-corp status eliminate self-employment tax?
It replaces it rather than eliminating it. S-corp profit splits into a W-2 salary — which pays regular FICA — and distributions, which escape payroll tax entirely. The salary must be reasonable compensation for your work, and the savings on the distribution slice have to beat the costs of payroll, the 1120-S return, and any state-level S-corp taxes. That trade typically starts working when profit runs well above a reasonable salary.
Can I deduct any of my self-employment tax?
Yes — half of it. The employer-equivalent portion of SE tax (excluding the 0.9% additional Medicare surtax) is deductible as an adjustment to income on Form 1040. It lowers your income tax and AGI, though not the SE tax itself, and it also reduces qualified business income before the QBI deduction is computed — so it is worth modeling in any projection.
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