What Is Self-Employment Tax? A Complete Guide for 2025
Self-employment tax (SE tax) is the federal tax that self-employed individuals pay to fund Social Security and Medicare. If you are a sole proprietor, LLC owner, independent contractor, freelancer, or gig worker, you are almost certainly subject to this tax. It is one of the largest tax obligations for self-employed people -- often exceeding their federal income tax -- and understanding how it works is critical for financial planning.
Unlike W-2 employees, who split FICA taxes 50/50 with their employer, self-employed individuals must pay both the employee and employer portions. The combined rate is 15.3% on net self-employment earnings, broken down into 12.4% for Social Security and 2.9% for Medicare. This can come as a shock to first-time freelancers or new business owners who are accustomed to seeing only the employee half (7.65%) deducted from their paychecks.
Who Pays Self-Employment Tax?
You must pay self-employment tax if your net self-employment earnings are $400 or more per year. This applies to:
- Sole proprietors who report business income on Schedule C
- Single-member LLC owners (taxed as disregarded entities by default)
- Multi-member LLC members (taxed as partnerships by default, each member's share)
- Independent contractors who receive 1099-NEC forms
- Freelancers and gig workers (Uber, DoorDash, Fiverr, Upwork, etc.)
- General partners in partnerships
- Farm operators who report farm income on Schedule F
Important: S-Corporation owners do NOT pay self-employment tax on distributions. They only pay FICA on their W-2 salary. This is the primary tax advantage of the S-Corp election and why many self-employed individuals consider it once their net profit exceeds $50,000 per year.
How Self-Employment Tax Is Calculated
The SE tax calculation involves several steps that our calculator handles automatically. Here is the full breakdown so you understand exactly what is happening:
Step 1: Determine Net Self-Employment Income. Start with your gross business revenue and subtract all legitimate business deductions (supplies, equipment, office expenses, mileage, etc.). The result is your net self-employment income, reported on Schedule C (Line 31) or your K-1 from a partnership.
Step 2: Apply the 92.35% Multiplier. Multiply your net SE income by 0.9235. This reduces the amount subject to SE tax. The IRS provides this adjustment to replicate the fact that W-2 employees do not pay FICA on the employer's matching contribution. For example, if your net SE income is $100,000, your taxable self-employment earnings are $92,350.
Step 3: Calculate Social Security Tax (12.4%). Apply the 12.4% Social Security rate to your taxable SE earnings, but only up to the Social Security wage base of $176,100 for 2025. If you also have W-2 wages from an employer, those count first toward the wage base. For instance, if you earn $80,000 in W-2 wages, only $96,100 of your SE earnings are subject to the Social Security portion ($176,100 minus $80,000).
Step 4: Calculate Medicare Tax (2.9%). Apply the 2.9% Medicare rate to ALL taxable SE earnings. There is no wage base cap for Medicare -- it applies to every dollar of self-employment income regardless of how much you earn.
Step 5: Calculate Additional Medicare Tax (0.9%). If your combined self-employment earnings and wages exceed $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately), the excess is subject to an additional 0.9% Medicare surtax. This tax was enacted as part of the Affordable Care Act.
Step 6: Total SE Tax. Add up Social Security tax + Medicare tax + Additional Medicare Tax. This is your total self-employment tax liability, reported on Schedule SE and transferred to your Form 1040.
The 92.35% Multiplier Explained
One of the most commonly misunderstood aspects of self-employment tax is the 92.35% multiplier. Here is why it exists and how it works in practice:
When you work as a W-2 employee, your employer pays half of your FICA taxes (7.65%), and only your wages -- not the employer's contribution -- are included in your taxable income. Self-employed individuals pay both halves, but the IRS allows a reduction to create parity. The formula is: 100% - 7.65% = 92.35%.
Example: If you earn $120,000 in net SE income, you do not pay SE tax on the full $120,000. Instead, your taxable SE earnings are $120,000 x 0.9235 = $110,820. At 15.3%, your SE tax is $16,955 instead of $18,360. The 92.35% multiplier saves you $1,405 in this scenario.
The Social Security Wage Base for 2025
The Social Security wage base is the maximum amount of earnings subject to the 12.4% Social Security tax. For 2025, this cap is $176,100, an increase from $168,600 in 2024. The Social Security Administration adjusts this threshold annually based on changes in the national average wage index.
| Tax Year | SS Wage Base | Year-Over-Year Increase |
|---|---|---|
| 2025 | $176,100 | +$7,500 |
| 2024 | $168,600 | +$8,400 |
| 2023 | $160,200 | +$13,200 |
| 2022 | $147,000 | +$4,200 |
| 2021 | $142,800 | +$5,100 |
Once your combined wages and SE earnings (after the 92.35% multiplier) exceed $176,100, the 12.4% Social Security tax stops. Only the 2.9% Medicare tax (and potentially the 0.9% additional Medicare tax) continues to apply above that level. This means high earners face an effective SE tax rate considerably lower than 15.3%.
Self-Employment Tax vs. FICA: Understanding the Difference
Self-employment tax and FICA (Federal Insurance Contributions Act) tax fund the same programs -- Social Security and Medicare -- but they apply to different types of workers:
| Feature | FICA (W-2 Employees) | SE Tax (Self-Employed) |
|---|---|---|
| Total Rate | 15.3% (split 50/50) | 15.3% (paid entirely by you) |
| Employee Pays | 7.65% | 15.3% (both halves) |
| Employer Pays | 7.65% | N/A |
| 92.35% Adjustment | Not applicable | Yes -- reduces taxable base |
| Half Tax Deduction | No | Yes -- above-the-line deduction |
| Reported On | W-2, Form 941 | Schedule SE, Form 1040 |
While the total rate is identical, self-employed individuals bear the full cost themselves. However, the 92.35% multiplier and the above-the-line deduction for half of SE tax partially offset this burden, bringing the effective rate closer to the employee-only portion.
Strategies to Reduce Your Self-Employment Tax
Self-employment tax is one of the most difficult taxes to reduce because it applies before most deductions and credits. However, several legitimate strategies can meaningfully lower your SE tax burden:
1. Elect S-Corporation Status. This is the single most impactful strategy for most self-employed individuals earning above $50,000 in net profit. By electing S-Corp status (filing Form 2553), you split your business income between a reasonable W-2 salary (subject to FICA) and distributions (not subject to SE tax). For example, if your LLC earns $150,000 in net profit and you pay yourself a reasonable salary of $70,000, only $70,000 is subject to FICA -- saving you roughly $12,240 in SE tax on the $80,000 in distributions.
2. Maximize Legitimate Business Deductions. Every dollar of legitimate business expense reduces your net SE income and therefore your SE tax. Common deductions include home office (simplified or actual), business mileage, equipment and supplies, professional development, health insurance premiums, and business travel. Ensure you are capturing every deduction you are entitled to.
3. Contribute to Retirement Accounts. SEP-IRAs allow contributions up to 25% of net self-employment earnings (up to $70,000 for 2025). Solo 401(k) plans offer even higher limits with both employee deferrals ($23,500) and employer contributions. While these do not reduce SE tax directly (the contributions come from income after SE tax), they reduce your adjusted gross income and therefore your federal and state income tax.
4. Deduct Self-Employed Health Insurance. If you pay for your own health insurance and are not eligible for an employer-sponsored plan, you can deduct 100% of premiums for yourself, your spouse, and dependents as an above-the-line deduction. This reduces your AGI but does not reduce SE tax itself.
5. Hire Family Members. Paying your spouse or children a reasonable wage for legitimate work performed in your business shifts income and can reduce the overall family tax burden. Children under 18 working for a parent's sole proprietorship or single-member LLC are exempt from FICA taxes entirely.
Pro Tip: The S-Corp election typically makes financial sense when net SE income exceeds $50,000 and the payroll cost savings outweigh the additional expense of running payroll, filing Form 1120-S, and paying a reasonable salary. Use our S-Corp Tax Calculator to model the savings for your specific situation.
How the Half-SE Tax Deduction Works
One often-overlooked benefit for self-employed individuals is the ability to deduct 50% of self-employment tax as an above-the-line deduction on your Form 1040. This means you do not need to itemize to claim it -- it directly reduces your adjusted gross income (AGI).
Here is how it works in practice: If your total SE tax is $14,130 (on $100,000 of net SE income), you can deduct $7,065 from your gross income before calculating federal income tax. This deduction reduces your taxable income and therefore your income tax, but it does NOT reduce your self-employment tax. It is purely an income tax benefit.
The deduction is calculated on Line 6 of Schedule SE and flows to Schedule 1, Part II, Line 15, and then to Form 1040, Line 10. It reduces AGI, which can also impact eligibility for other tax benefits that phase out based on AGI, such as the QBI deduction, student loan interest deduction, and various credits.