Self-employment tax. What it is, who pays it, how to reduce it.
Self-employment tax is the self-employed equivalent of FICA. W-2 employees split 7.65% with their employer; self-employed individuals pay both halves (15.3% combined). For LLC owners, this is typically the single largest federal tax obligation. This guide explains the math, the cap on Social Security, the S-Corp election that reduces SE tax exposure, and the worked examples.
Start here.
15.3% combined: 12.4% Social Security + 2.9% Medicare. Applied to 92.35% of net SE earnings.
$168,600 in 2024 (adjusted annually). SE earnings above this cap are not subject to the 12.4% SS portion. Medicare portion (2.9%) has no cap.
0.9% extra on earnings above $200,000 single ($250,000 joint). Total Medicare on high earnings: 3.8%.
Half of SE tax (the employer-equivalent portion) is deductible above the line on Schedule 1 of 1040. Reduces taxable income for federal income tax purposes.
Distributions from an S-Corp are not subject to SE tax. Owner-employee W-2 wages are subject to FICA. Strategy: pay reasonable W-2 wages, take rest as distributions.
The full explanation.
Who owes SE tax
Sole proprietors, single-member LLC owners (default), members of multi-member LLCs taxed as partnerships (if active in the business), partners in partnerships, 1099 contractors. Generally NOT: S-Corp owners (only on W-2 portion of compensation), C-Corp owners, passive investors.
Calculation
Step 1: Calculate net self-employment earnings (income minus expenses). Step 2: Multiply by 92.35% (the deduction for SE tax itself). Step 3: Apply 15.3% to amount up to SS wage base. Step 4: Apply 2.9% to amount above wage base. Step 5: Apply additional 0.9% Medicare to amount above $200k (single) / $250k (joint).
The 92.35% adjustment
Because half of SE tax is itself deductible from SE earnings for SE tax purposes, the calculation uses 92.35% of net earnings (which equals 100% / (1 + 7.65%)). This adjustment is automatic on Schedule SE.
Half deduction (Schedule 1)
Half of total SE tax (the employer-equivalent half) is deductible above the line on Schedule 1 of 1040. This reduces AGI, which reduces federal and most state income tax.
S-Corp election strategy
S-Corp owner-employees receive W-2 wages (FICA applies, 15.3% combined between employer and employee) plus distributions (no FICA, no SE tax). The IRS requires "reasonable compensation" as wages. Common formula: industry benchmark salary as wages, remaining profit as distribution. Saves SE tax on the distribution portion.
Reasonable compensation guidance
No bright line. IRS factors: training, experience, role, business comparables, time devoted, business needs. RC Reports and other tools generate documented benchmarks. Underpaying salary to inflate distributions is a top audit target.
Multi-state SE tax
SE tax is federal only, not state. State income tax applies based on state of residence and business activity. Some states tax self-employed income at higher effective rates than wages; others treat them similarly.
Quarterly payment
SE tax is paid through quarterly estimated tax payments (Form 1040-ES), not through a separate SE tax form. The full quarterly estimated tax includes both federal income tax and SE tax.
Worked example: $150,000 net SE earnings (single, no W-2 spouse)
| Net SE earnings | $150,000 |
| Adjusted (× 92.35%) | $138,525 |
| SS portion: 12.4% × min($138,525, $168,600) | $17,177 |
| Medicare portion: 2.9% × $138,525 | $4,017 |
| Additional Medicare: 0.9% × max($138,525 − $200k, 0) | $0 (below threshold) |
| Total SE tax | $21,194 |
| Half deductible on Schedule 1 | $10,597 |
| S-Corp alternative: $80k wages, $70k distribution | FICA on $80k = $12,240. Savings: ~$8,954. |
Common questions.
What is self-employment tax?
Who pays self-employment tax?
How is self-employment tax calculated?
How can I reduce self-employment tax?
Does an LLC pay self-employment tax?
Do I pay it in addition to income tax?
How do I pay self-employment tax?
At what income does an S-corp start saving?
Can File.Business help me manage self-employment tax?
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