What is the Self-Employment Tax?

Updated: May 6

What is it?


All self-employed small business owners are required to pay a self-employment tax. This tax includes the tax for Social Security and Medicare paid by business owners. It's the Tax commonly referred to as FICA that is paid by employees and employers of corporations. However, with a self-employed business owner, that tax is paid in a different way.


Tax Rate


The self-employment tax calculation is 15.3% of your net business income. The tax rate includes Social Security and Medicare. There are two parts to this rate break down as follows:

  • Social Security: 12.4%. Social Security is capped at a maximum amount each year.

  • Medicare: 2.9%.

Please Note: If your annual income from employment and self-employment is over a certain amount, you must pay an additional Medicare tax of 0.9% on that income.


What Types of Businesses Pay Self-Employment Taxes?


All pass-through small businesses must pay self-employment taxes. This includes:

  • Sole Proprietors (independent contractors and freelancers

  • Partnerships

  • S Corporation Owner

  • Limited Liability Company (LLC) owners

Because owners of corporations are not self-employed and are shareholder, they do not pay self-employment tax.


What if I Have Both a Job and a Small Business?


If you have both employment and self-employment income, the IRS considers the two as combined because it ensures that:

  • Social Security is stopped at the maximum for the year.

  • The additional Medicare Tax begins at the threshold point

  • There is and accurate calculation of the self-employment tax.

  • Employment income is considered first, then self-employment income, up to the Social Security maximum.

If you have both employment and self-employment then you must use the long form of Schedule SE.


Know When to Seek Professional Guidance


Self-employment taxes can be very challenging and complicated. This article is intended to give you a basic understanding of the topic. Your tax professional can provide you with an in-depth look at your individual situation. If you must file the long form of Schedule SE, it is recommended that you get help from a tax professional to make sure your self-employment tax is complete and accurate.

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