Question 1

What is self-employment tax?

Accepted Answer

Self-employment tax is the 15.3% combined Social Security (12.4%) and Medicare (2.9%) tax that self-employed people pay on their net earnings. W-2 employees split these taxes 50/50 with their employer; self-employed people pay both halves themselves, which is why the rate looks so high. The tax funds the same Social Security and Medicare benefits W-2 workers receive — it's not a separate tax on top of income tax. SE tax is calculated on Schedule SE and reported on Form 1040 Schedule 2. Source: IRS Schedule SE (https://www.irs.gov/forms-pubs/about-schedule-se-form-1040), IRC §1401.

Question 2

Who pays self-employment tax?

Accepted Answer

Anyone who nets $400 or more from self-employment in a year per IRC §1402(b)(2). That includes sole proprietors filing Schedule C, single-member LLC owners (treated as sole proprietors by default), partners in a partnership receiving guaranteed payments or distributive share of ordinary income, and independent contractors / gig workers (1099 income from Uber, DoorDash, freelance clients, Substack, etc.). It does NOT include S-corporation shareholders on their distributions (only on their W-2 salary) per IRC §1361(a), C-corp shareholders, real estate rental income (typically passive), or W-2 employees on their wages.

Question 3

Why is the calculation × 92.35% (the 'employer-half exclusion')?

Accepted Answer

Per IRC §1402(a)(12), net SE earnings are calculated as net Schedule C profit × 92.35% before applying the 15.3% rate. The 7.65% reduction accounts for the FICA tax a W-2 employee's employer would have paid on their wages, which the employee never sees on their paycheck. Without this adjustment, self-employed people would effectively pay tax on tax — they'd owe SE tax on income that, if earned as W-2 wages, would have been reduced by the employer's FICA contribution. The 92.35% multiplier keeps the SE tax math comparable to the W-2 + employer-FICA scenario.

Question 4

How is half of SE tax deductible?

Accepted Answer

Per IRC §164(f), you can deduct half of your SE tax (the 'employer-equivalent half') as an above-the-line deduction on Schedule 1 line 15. This reduces your Adjusted Gross Income (AGI), which can also unlock or expand other AGI-tied benefits like the QBI deduction, IRA contribution limits, and certain credits. Important: the deduction is on the regular SE tax (12.4% SS + 2.9% Medicare) only. Per IRC §164(f)(2), the 0.9% Additional Medicare surtax (IRC §1401(b)(2)) is NOT deductible (it's an employee-only tax, with no employer-side equivalent).

Question 5

What is the 0.9% Additional Medicare tax?

Accepted Answer

Per IRC §1401(b)(2), an additional 0.9% Medicare tax applies to combined wages + SE earnings above filing-status thresholds: $200,000 single, $250,000 married filing jointly, $125,000 married filing separately, $200,000 head of household. These thresholds are NOT indexed for inflation, so they catch more taxpayers each year. The surtax is reported on Form 8959 and is paid only by the employee (or self-employed person) — there's no employer-side match. Because it's employee-only, it's NOT included in the half-of-SE-tax above-the-line deduction.

Question 6

Can I avoid SE tax with an S-corp election?

Accepted Answer

Yes, partially — and this is the single most common SE-tax-reduction strategy. After a profitable LLC files Form 2553 to elect S-corporation status per IRC §1362(b), the owner pays themselves a 'reasonable' W-2 salary (subject to FICA) and takes the rest of the profit as distributions (NOT subject to SE tax). For a $200K profit owner paying a $100K salary, this saves roughly $14,000/year in SE tax per IRC §1401 computation. The IRS scrutinizes 'reasonable compensation' — paying yourself $30K when your industry pays $120K invites audit. Other costs: payroll runs, separate accounting, and state-level S-corp fees. Generally worth it above ~$80K of net SE earnings; talk to a CPA before electing.

Question 7

What income counts as self-employment earnings?

Accepted Answer

Net profit from Schedule C (sole proprietorships and single-member LLCs taxed as sole props), Schedule F (farming), Schedule K-1 box 14 self-employment earnings (general partners, LLC members in partnerships), and certain board-of-director fees. It does NOT include: rental real estate income (Schedule E, generally passive), interest and dividends (investment income), capital gains, S-corp distributions (only the W-2 portion has FICA), or notary fees (specifically excluded). Hobby income is excluded — but the IRS rule is that activity must be 'engaged in for profit' to be a hobby vs. a business; if you've made profit in 3 of the last 5 years, presumed to be a business.

Question 8

Does this apply to single-member LLC owners?

Accepted Answer

Yes — by default, single-member LLCs are 'disregarded entities' for federal tax purposes, meaning the IRS treats the owner exactly like a sole proprietor. You file a Schedule C and owe SE tax on the net profit. Forming the LLC gives you legal liability protection but does NOT change your federal tax treatment unless you actively elect (a) S-corp status via Form 2553, or (b) C-corp status via Form 8832. Multi-member LLCs default to partnership tax treatment; partners report SE earnings on Schedule K-1 box 14 and owe SE tax on their distributive share of ordinary income.

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