Self-Employment Tax: How It's Calculated, Who Pays It, and How to Reduce It

By Yarik Yarosh, CPA ·September 5, 2026 ·8 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

Self-employment tax is the self-employed person’s equivalent of FICA (Social Security + Medicare) that employers and employees split for W-2 workers. A W-2 employee pays 7.65% of wages for their share, and the employer pays 7.65%, for a combined 15.3%. A self-employed individual pays both halves: the full 15.3%, calculated on 92.35% of net self-employment income (the 92.35% factor accounts for the “employer” half, simulating the fact that employees only pay FICA on wages after the employer’s share is considered). The deductible half (the “employer” portion, 7.65%) is deducted on the front of Form 1040 (Line 15), reducing adjusted gross income. Self-employment tax is often the largest single tax a small business owner pays, exceeding income tax for businesses earning $50,000-$100,000 in net profit.

✓Key takeaway

Self-employment tax calculation:

The formula:

Start with Schedule C net profit (or K-1 self-employment income)
Multiply by 92.35% (this is the “net earnings from self-employment”)
Apply Social Security rate: 12.4% on the first $176,100 (2025 wage base)
Apply Medicare rate: 2.9% on ALL net earnings (no cap)
Apply Additional Medicare Tax: 0.9% on net earnings above $200,000 single / $250,000 MFJ
Total = Social Security + Medicare + Additional Medicare (if applicable)
Deduct half (7.65% equivalent) on Form 1040 Line 15

2025 rates and thresholds:

Component	Rate	Wage Base
Social Security	12.4%	$176,100 (2025)
Medicare	2.9%	No limit
Additional Medicare Tax	0.9%	Above $200,000 single / $250,000 MFJ
Total (under wage base)	15.3%
Total (above wage base, under $200K)	2.9%
Total (above $200K)	3.8%

SE tax at various income levels:

Net Profit	SE Tax	Effective SE Rate	After SE Deduction
$30,000	$4,239	14.13%	$2,120 deduction
$50,000	$7,065	14.13%	$3,533 deduction
$75,000	$10,597	14.13%	$5,299 deduction
$100,000	$14,130	14.13%	$7,065 deduction
$150,000	$21,194	14.13%	$10,597 deduction
$176,100 (SS wage base)	$24,885	14.13%	$12,443 deduction
$200,000	$25,578	12.79%	$12,789 deduction
$250,000	$27,028	10.81%	$13,514 deduction

Above the Social Security wage base ($176,100), the SE rate drops from 15.3% to 2.9% (Medicare only). Above $200,000, it increases to 3.8% (Additional Medicare Tax).

Three ways to reduce SE tax:

1. S-Corp election (largest impact): Only the salary is subject to FICA. Distributions aren’t. At $100,000 net profit with $55,000 salary:

SE tax as sole prop: $14,130
FICA as S-Corp: $55,000 x 15.3% = $8,415
Savings: $5,715/year

2. Retirement plan contributions: SEP IRA contributions reduce net income for the SE deduction calculation but NOT for SE tax itself. However, SEP contributions reduce taxable income (saving income tax). Solo 401(k) employee deferrals also don’t reduce SE income. The retirement plan reduces income tax, not SE tax directly.

3. Business expense maximization: Every legitimate business deduction reduces SE income. A $5,000 expense saves:

Income tax: $5,000 x 22% = $1,100
SE tax: $5,000 x 14.13% = $707
Total: $1,807 tax savings on $5,000 of expenses

How does self-employment tax compare to W-2 employment tax?

Hypothetical example

Round numbers. For current guidance, see IRS Publication 334 (Tax Guide for Small Business). Comparing a W-2 employee earning $80,000 to a sole proprietor earning $80,000 in net profit.

W-2 Employee ($80,000 salary):

Tax	Calculation	Amount
Employee FICA (7.65%)	$80,000 x 7.65%	$6,120
Employer FICA (7.65%, not visible to employee)	$80,000 x 7.65%	$6,120
Total FICA (both halves)		$12,240
Employee’s visible paycheck deduction		$6,120

The employee sees $6,120 deducted from their pay. The employer pays an additional $6,120 that the employee never sees.

Sole Proprietor ($80,000 net profit):

Tax	Calculation	Amount
SE tax (15.3% x 92.35%)	$80,000 x 92.35% x 15.3%	$11,304
SE deduction (half, on 1040 Line 15)	$11,304 / 2	($5,652)
Net SE tax cost		$11,304

The sole proprietor pays $11,304, which is $936 LESS than the combined employee + employer FICA ($12,240). This is because the 92.35% factor reduces the SE tax base.

But: the sole proprietor writes one check for $11,304. The employee only sees $6,120 deducted from their pay. The psychological burden is higher for the self-employed person, even though the actual cost is slightly lower.

The Social Security benefit: SE tax funds Social Security credits. A self-employed person earning $80,000 receives the same Social Security credits as a W-2 employee earning $80,000. The SE tax isn’t “lost”; it builds retirement benefits, disability coverage, and Medicare eligibility.

To earn the maximum 4 credits per year (2025): need $7,080 in self-employment income ($1,770 per credit).

SE tax vs. income tax (the surprise):

Net Profit	SE Tax	Income Tax (single, std ded)	SE as % of Total
$50,000	$7,065	$3,528	67%
$75,000	$10,597	$7,303	59%
$100,000	$14,130	$11,378	55%
$150,000	$21,194	$21,228	50%

At $50,000-$75,000 in net profit, SE tax is the MAJORITY of the total tax bill. This is why the S-Corp election (which reduces SE tax) has the largest impact at moderate income levels.

The Additional Medicare Tax (high earners): Above $200,000 in net SE income (single filer):

Regular Medicare: 2.9%
Additional Medicare Tax: 0.9%
Total Medicare above $200K: 3.8%

On $300,000 net profit:

Social Security: $176,100 x 12.4% = $21,836
Medicare (all income): $300,000 x 92.35% x 2.9% = $8,034
Additional Medicare: ($300,000 x 92.35% - $200,000) x 0.9% = $693
Total SE tax: $30,563

The Additional Medicare Tax adds $693 on $300,000. It becomes more significant at higher incomes ($500,000+).

Planning strategies by income level:

Income	Primary SE Tax Strategy
Under $40,000	Maximize deductions, no S-Corp needed
$40,000-$60,000	Maximize deductions, evaluate S-Corp
$60,000-$100,000	S-Corp election (saves $2,000-$6,000/year)
$100,000-$176,100	S-Corp election (saves $6,000-$12,000/year)
Above $176,100	S-Corp + retirement plan optimization
Above $200,000	S-Corp + Additional Medicare Tax planning

Illustrative numbers only, not a real client and not advice for your facts.

What strategies can reduce self-employment tax?

The most common approach is electing S-Corp status, which lets you split business income between a reasonable salary (subject to payroll tax) and distributions (not subject to FICA). Maximizing legitimate business deductions reduces net profit and therefore the base for self-employment tax. Contributing to a SEP-IRA or solo 401(k) reduces income tax but does not reduce self-employment tax because the contribution is calculated after SE tax. Hiring your children under age 18 (for a sole proprietorship or spousal partnership) shifts income to them without triggering FICA on their wages. Forming a limited partnership where you are a limited partner can avoid SE tax on partnership income, but the IRS scrutinizes this closely for service businesses.

How is the self-employment tax calculated?

Self-employment tax is 15.3% on net self-employment income up to the Social Security wage base ($168,600 in 2024), then 2.9% on income above that threshold. Net self-employment income is calculated as 92.35% of your Schedule C net profit (the 7.65% reduction approximates the employer-half FICA deduction that W-2 workers receive). You deduct half of the self-employment tax on Schedule 1 of Form 1040, which reduces your AGI and income tax but does not reduce the SE tax itself. The additional Medicare tax of 0.9% applies to combined wages and self-employment income exceeding $200,000 ($250,000 married filing jointly). This makes the effective rate on high-income self-employment earnings 16.2%.

Related guides:

How do you calculate the self-employment tax deduction?

The self-employment tax is 15.3% of net self-employment earnings (12.4% Social Security on income up to the wage base of $176,100 for 2025, plus 2.9% Medicare on all earnings). Before calculating the tax, you multiply net earnings by 92.35% (0.9235) to account for the fact that employees only pay tax on wages after the employer’s share is excluded. You deduct half of the self-employment tax as an above-the-line deduction on Form 1040, which reduces your AGI but not your self-employment income for SE tax calculation purposes. The additional 0.9% Medicare surtax applies to self-employment income exceeding $200,000 for single filers or $250,000 for joint filers, and this additional tax is not eligible for the 50% deduction.

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Cite this page

Yarik Yarosh, CPA. "Self-Employment Tax: How It's Calculated, Who Pays It, and How to Reduce It." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-self-employment-tax-calculation-reduction

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.