What is self-employment tax?
When you're a W-2 employee, your employer pays half of your Social Security and Medicare taxes (FICA). You pay the other half through payroll withholding — 6.2% Social Security + 1.45% Medicare = 7.65% from your paycheck, with your employer matching it.
When you're self-employed, there's no employer to pay that matching half — you pay both the employee and employer share. That's 12.4% + 2.9% = 15.3% total on net self-employment earnings up to the Social Security wage base ($176,100 in 2026). Above that, the 12.4% Social Security tax stops but the 2.9% Medicare tax continues (plus 0.9% Additional Medicare Tax above $200,000).
How SE tax is calculated
Self-employment tax applies to 92.35% of your net self-employment income (not 100%), because the IRS allows a deduction for the employer-equivalent portion:
Net self-employment income: $100,000 SE tax base: $100,000 × 92.35% = $92,350 SE tax (15.3%): $92,350 × 15.3% = $14,130
You then deduct 50% of SE tax paid as an above-the-line deduction on your income tax return — in this example, $7,065. This partially offsets the SE tax burden.
For income above $176,100 (2026 Social Security wage base): only 2.9% Medicare applies to income above that threshold, not the full 15.3%.
Does a Solo 401(k) reduce self-employment tax?
No. Solo 401(k) contributions reduce your federal income tax (they lower your adjusted gross income) but they do not reduce self-employment tax. SE tax is calculated on net self-employment income before the 401(k) deduction.
To reduce SE tax, you need to change your business structure:
S-Corp election: An LLC or corporation taxed as an S-Corp pays you a 'reasonable salary' (subject to SE tax/FICA) and distributes remaining profits (not subject to SE tax). This can save $5,000–$15,000 in SE taxes for self-employed workers earning $80,000–$200,000+.
Important: The S-Corp strategy comes with administrative costs (payroll processing, corporate tax returns, state filing fees) that typically make it worthwhile above $80,000–$100,000 in net self-employment income.
Additional Medicare Tax (NIIT)
High-earning self-employed workers face two additional taxes above $200,000 (single) / $250,000 (married filing jointly):
Additional Medicare Tax: 0.9% on self-employment income above $200,000/$250,000. Applied through Schedule SE.
Net Investment Income Tax (NIIT): 3.8% on investment income (dividends, capital gains, rental income) above the threshold. Does not apply to self-employment income directly, but affects total tax burden for high earners with investments.
These additional taxes are part of the Affordable Care Act and affect self-employed workers differently than employees.
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Frequently Asked Questions
What percentage of self-employment tax do I owe?
You owe 15.3% in self-employment tax on 92.35% of your net self-employment income up to the Social Security wage base ($176,100 in 2026). Above that, you pay 2.9% Medicare on the excess. You can deduct 50% of SE tax paid from your gross income on your federal return.
How do I pay self-employment tax?
Self-employment tax is calculated on Schedule SE and reported on your Form 1040. You pay it through quarterly estimated tax payments (IRS Form 1040-ES) — due April 15, June 16, September 15, and January 15. Underpaying estimated taxes results in a penalty.
Does an S-Corp eliminate self-employment tax?
An S-Corp doesn't eliminate SE tax — it reduces it. You pay yourself a reasonable W-2 salary (subject to FICA taxes), and remaining profits are distributed as dividends (not subject to SE tax or FICA). This split typically saves 15.3% on the portion treated as distributions rather than salary.