Definition
Self-employment tax is the Social Security and Medicare tax paid by self-employed individuals on their net earnings.
How It Works
Employees split these taxes with their employer, but the self-employed pay both halves, currently 15.3% up to the Social Security wage base and 2.9% for Medicare above it, plus an additional Medicare surtax at higher income. Half of the tax is deductible above the line.
Example
A consultant with $150,000 of net self-employment income pays both the employer and employee share of these taxes, deducting half.
Who It Applies To
Sole proprietors, partners, and other self-employed individuals.
Watch-Outs
An S-corp election can reduce this tax by splitting income into salary and distributions, though reasonable compensation rules apply.
