Self-employment tax is the Social Security and Medicare tax paid by individuals who work for themselves. It is the self-employed equivalent of FICA taxes that W-2 employees and their employers split. Because self-employed individuals are both the employee and employer, they pay the full 15.3% rate: 12.4% for Social Security (on net earnings up to $168,600) and 2.9% for Medicare (on all net earnings).
Self-employment tax applies to anyone with net self-employment earnings of $400 or more per year. This includes freelancers, independent contractors, sole proprietors, and partners in a partnership. It is calculated on Schedule SE of your tax return and is in addition to your federal and state income tax.
The calculation starts with your net self-employment income (Schedule C profit). The IRS allows you to multiply this by 92.35% (0.9235) before applying the 15.3% rate, which accounts for the employer-equivalent portion. You can then deduct 50% of the SE tax paid as an above-the-line adjustment on your Form 1040, reducing your adjusted gross income.
Example: $100,000 net self-employment income × 0.9235 = $92,350 × 0.153 = $14,130 in SE tax. The deductible half ($7,065) reduces your AGI, saving you additional income tax.
To reduce self-employment tax, consider forming an LLC and electing S-Corp status. This allows you to pay a reasonable salary (subject to FICA) and take remaining profits as distributions not subject to SE tax. See the Quarterly Tax Guide for payment strategies.