Self-Employment Tax Guide

How self-employment tax works

SE tax = (net SE earnings × 92.35%) × 15.3%

The 92.35% adjustment accounts for the fact that an employee would have employer-paid FICA NOT included in their wages.

Components:

• Social Security: 12.4% on first $168,600 (2024 wage base; adjusts annually)
• Medicare: 2.9% on all earnings (no cap)
• Additional Medicare 0.9% on earnings over $200,000 (single) / $250,000 (MFJ)

Example: $80,000 net SE income. SE tax = $80,000 × 0.9235 × 0.153 = $11,304.

Quarterly estimated tax deadlines

Underpayment penalties apply if you owe more than $1,000 at year-end and didn't pay enough quarterly.

Safe harbor rule

To avoid underpayment penalties, pay quarterly the lesser of:

• 90% of current year's actual tax liability
• 100% of prior year's tax liability (110% if prior year AGI > $150K)

The "prior year safe harbor" is easiest because you know the number — just pay 25% of last year's total tax each quarter.

Deductions that reduce SE tax

1. SE tax deduction: half of SE tax is deductible from gross income (an above-the-line deduction). Doesn't reduce SE tax itself but reduces income tax.
2. Home office deduction: if you use part of home regularly and exclusively for business — actual expense method or simplified $5/sq ft up to $1,500.
3. Health insurance premiums: 100% deductible if you're self-employed and not eligible for employer/spouse coverage. Above-the-line (no itemizing required).
4. Retirement contributions: SEP IRA, Solo 401k, SIMPLE IRA — large allowable contributions for self-employed (Solo 401k max $69K in 2024; $76,500 if 50+).
5. QBI deduction: 20% deduction on qualified business income (with limits at certain thresholds and for certain professions).
6. Vehicle expenses: standard mileage rate ($0.67/mile in 2024) OR actual expenses (gas, maintenance, depreciation).
7. Equipment depreciation: Section 179 lets you deduct entire cost of qualifying equipment up to $1.16M in year 1 (2024).

S-Corp election to reduce SE tax

If self-employment net income is consistently $50,000+, electing S-Corp tax status can reduce SE tax meaningfully:

1. Form an LLC (or already have one)
2. File Form 2553 to elect S-Corp tax treatment
3. Pay yourself a "reasonable salary" through W-2 wages (subject to FICA)
4. Take remaining profit as "distribution" (NOT subject to SE tax)

Example: $150,000 net business income. As sole proprietor: SE tax ≈ $21,000. As S-Corp with $80,000 reasonable salary + $70,000 distribution: FICA on $80K ≈ $12,200, saving $8,800 annually. After ~$1,500-$3,000/yr in additional payroll/accounting costs, net savings $5,000-$7,000+.

"Reasonable salary" is IRS's key test — must reflect what you'd pay an employee for the same work in your industry/region. Going too low triggers audits.

Frequently Asked Questions

When do I have to pay SE tax?

SE tax is owed when you have net self-employment earnings of $400 or more in a year. Below that threshold, no SE tax (but still report income for income tax).

Is self-employment tax in addition to income tax?

Yes. SE tax (15.3%) is in addition to federal income tax (10-37%) and state income tax. Combined marginal rate often 35-50%.

Can I deduct half of SE tax?

Yes — half of SE tax is an above-the-line deduction (reduces AGI). Doesn't reduce SE tax itself, but reduces income tax base.

What's the difference between SE tax and FICA?

Same thing functionally. FICA (Social Security + Medicare) is what employees and employers each pay 7.65% of. Self-employed pay both halves = 15.3%.

Do I need an EIN if I'm self-employed?

Not required if you have no employees and don't form an LLC/Corp. You can use your SSN. EIN is recommended for asset/liability separation and easier business banking.