Self-Employment Tax

Self-Employment Tax

Introduction

With the growing number of freelancers, sole proprietors, and small business owners in the US, understanding the tax obligations associated with self-employment has become increasingly relevant.

A key element of this tax burden is the Self-Employment Tax (SE tax), which covers contributions to social funds (Social Security and Medicare).

This guide will help you understand who must pay this tax, how it is calculated, which forms to use, and what strategies can help reduce the tax burden.

What is Self-Employment Tax?

Self-Employment Tax (SE tax) is a federal tax intended to cover mandatory contributions to:

• Social Security (the retirement system);

• Medicare (health insurance for the elderly).

For traditional employees working for an employer, these taxes are automatically withheld from wages, and the employer pays half (7.65%). However, a self-employed individual must pay the full rate—15.3% (12.4% for Social Security and 2.9% for Medicare).

Who is Required to Pay SE Tax?

You are required to pay the Self-Employment Tax if:

• You earned net earnings from self-employment of $400 or more during the year;

• You operate as a:

  • Sole proprietor;

  • Independent contractor;

  • Member of a partnership (if general partner);

  • Single-member LLC owner (if taxed as a sole proprietorship).

Exceptions:

• Income from rent, dividends, or passive investments is not subject to SE Tax.

• If you are a passive (limited) partner.

• Ministers and members of certain religious orders may have special rules.

• S Corporation owners do not pay SE Tax on distributed profits (distributions), but they are required to pay themselves a “reasonable salary,” from which ordinary payroll taxes—including Social Security and Medicare—are withheld as for regular employees.

How is SE Tax Calculated?

Tax Rate: 15.3% of the net income earned from self-employment:

• 12.4% — for the Social Security system (up to the limit set by the IRS);

• 2.9% — for Medicare (with no limit).

Example of SE Tax Calculation:

Suppose you earned $80,000 from freelancing and spent $15,000 on business expenses. Then:

1. Net Income: $80,000 – $15,000 = $65,000.

2. Taxable Base: Multiply by 92.35% (the taxable base according to IRS rules): $65,000 * 0.9235 = $60,027.50.

3. Self-Employment Tax: $60,027.50 * 15.3% = $9,184.21.

• Out of this amount:

  • $7,443.41$ — to Social Security (limited to the cap, which is $176,100 in 2025).

  • $1,740.80$ — to Medicare.

In 2025, only the first $176,100 of income is subject to the Social Security portion of the tax. All income is subject to the Medicare portion.

Strategies to Reduce SE Tax

1. Optimize Business Expenses

• Account for all allowable expenses: equipment, internet, office rent, business travel, advertising.

• Don’t forget about depreciation, the home office deduction, and mileage expenses.

2. Opening an S-Corp

• If your income is around $60,000 or more (depending on the state), you should consider registering an S Corporation.

• Part of the income is paid as a salary (subject to SE Tax), and the rest is taken as distributed profits (not subject to SE Tax).

• Requires an official salary payment and filing Form 1120S and issuing Form W-2.

• Important: Be sure to consult with a tax professional!

3. Family Payments

• Payments to children (under 18) from the business may be exempt from SE Tax if properly documented.

4. Retirement Plans

• Contributions to a SEP IRA or Solo 401(k) reduce your taxable income.

Frequently Asked Questions (FAQ)

Do I have to pay SE Tax if I only have losses?

No. If your net profit is below $400, you are not required to pay SE Tax, but you may still be required to file a return.

I freelance on the side, but my main job is as an employee. What about SE Tax?

SE Tax is only levied on self-employment income. Your salary is already subject to FICA taxes by your employer. However, if you earned more than $400 additionally from freelancing, that income is subject to SE Tax.

Do I have to pay SE Tax if I don’t live in the US but am a tax resident?

Yes. The IRS taxes the self-employment income of all U.S. persons, regardless of where they live. However, there may be exceptions if there is a treaty for exemption from social taxes (a Totalization Agreement) with your country of residence.