Self-Employment Tax: How the 15.3% Rate Works and How the S-Corp Reduces It
Self-employment tax is the self-employed equivalent of the FICA taxes that employees and employers split. An employee pays 7.65% (6.2% Social Security + 1.45% Medicare) and the employer pays 7.65%, for a combined 15.3%. A self-employed individual pays both halves: 15.3% on net self-employment income up to the Social Security wage base ($176,100 for 2025), then 2.9% (Medicare only) on income above the wage base. An additional 0.9% Medicare surtax applies to SE income exceeding $200,000 single / $250,000 MFJ.
The self-employment tax calculation starts with net profit from Schedule C (or the partner’s share of partnership income). The net profit is multiplied by 92.35% (the equivalent of the employer-share reduction that employees get). The result is “net earnings from self-employment,” and the tax is 15.3% on the first $176,100 and 2.9% on the excess. Half of the SE tax is deductible as an adjustment to income on Form 1040 (line 15), which reduces AGI and income tax. The S-Corp strategy works by splitting income between a W-2 salary (subject to FICA) and distributions (not subject to FICA). The salary must be “reasonable” for the services performed, but the distribution portion avoids the 15.3% / 2.9% SE tax entirely. The S-Corp does NOT save income tax (salary and distributions are both subject to income tax). It saves ONLY FICA/SE tax.
How is self-employment tax calculated?
How does the S-Corp reduce SE tax?
What about income above $200,000?
Self-employed individuals earning above $200,000 (single) or $250,000 (MFJ) pay the Additional Medicare Tax: 0.9% on the excess. Combined with the regular 2.9% Medicare tax, the total Medicare rate above the threshold is 3.8%.
For S-Corp owners, the Additional Medicare Tax applies only to W-2 wages exceeding the threshold. Distributions are not subject to the Additional Medicare Tax. However, S-Corp distributions may be subject to the Net Investment Income Tax (NIIT) of 3.8% under IRC 1411 if the shareholder does not materially participate in the business (uncommon for owner-operators).
What strategies can reduce my self-employment tax burden?
The most effective strategy is electing S-Corp taxation, which allows you to pay FICA only on a reasonable salary rather than on all net self-employment income. Maximizing business deductions on Schedule C (home office, vehicle) reduces net self-employment income, which directly reduces the SE tax base. The self-employed health insurance deduction and retirement contributions for yourself reduce income tax but not SE tax. Hiring your spouse and paying them a reasonable wage shifts some income to the employer side of FICA (which you still pay) but can enable benefits like a larger retirement plan contribution through the spouse’s employment. If you have both W-2 employment and self-employment income, your W-2 wages count toward the Social Security wage base ($168,600 in 2024), so self-employment income above the remaining cap is subject only to the 2.9% Medicare portion. Income splitting through a family partnership can also reduce the overall SE tax if the partnership interests are genuine and the family members provide real services or capital.
Is there a way to deduct the employer-equivalent portion of self-employment tax?
Yes. You deduct half of your self-employment tax as an above-the-line deduction on Schedule 1 of Form 1040. This deduction exists because W-2 employees have their employer’s share of FICA (7.65%) paid by the employer without it being included in the employee’s taxable income. The self-employed equivalent gives you the same treatment. The deduction reduces your adjusted gross income (AGI), which can help you qualify for other tax benefits that phase out at higher AGI levels (IRA deductions, education credits, the QBI deduction threshold). However, this deduction does not reduce your net self-employment income for purposes of calculating the self-employment tax itself. The calculation is circular: SE tax is calculated first, then half is deducted from income tax. This deduction is automatic when you file Schedule SE; no special election or form is required.
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- Self-Employment Tax for US Citizens in Canada: CPP vs FICA
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Yarik Yarosh, CPA. "Self-Employment Tax: How the 15.3% Rate Works and How the S-Corp Reduces It." Blue Cloud CPA, September 5, 2026, updated September 23, 2026. https://bluecloudcpa.com/guides/self-employment-tax-calculation-guide
This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.