What is self-employment tax and how much is it?

Self-employment tax is the Social Security and Medicare tax that a self-employed person pays on their net business earnings, covering both the employee and employer halves that a wage earner splits with an employer. It applies once net earnings reach a low annual threshold, and half of it is deductible against income.

For tax year 2025

15.3% (12.4% Social Security up to the wage base, plus 2.9% Medicare) (self-employment tax rate, 2025)
$176,100 (Social Security wage base, 2025)
$400 (self-employment tax filing threshold, 2025)

Key points

Self-employment tax is the combined employee and employer share of Social Security and Medicare tax paid by a self-employed person on net business earnings.
The tax is calculated on Schedule SE and applies once net earnings from self-employment reach a low annual threshold.
The Social Security portion stops at the annual wage base, while the Medicare portion applies to all net earnings with no ceiling.
Half of self-employment tax is deductible against income tax, and the tax itself is computed on a reduced share of net earnings.
An S-corporation pays employment tax on the owner's reasonable salary but not on distributions, which is why the election is used to manage this tax.

What is self-employment tax and who pays it?

A wage earner and their employer each pay half of Social Security and Medicare tax. A self-employed person is both employer and employee, so they pay both halves themselves. That combined amount is self-employment tax, computed on Schedule SE and paid with Form 1040 alongside income tax.

It applies to net earnings from self-employment: profit from a Schedule C business, a general partner's share of partnership income, and guaranteed payments from a partnership. It starts once net earnings reach a low annual threshold, and it applies whether or not the owner takes any money out of the business.

How is the self-employment tax rate structured?

The rate has two parts. The Social Security portion applies only up to an annual wage base that adjusts each year, and the base is shared with any W-2 wages the owner also earned that year. The Medicare portion applies to all net earnings with no ceiling, and an additional Medicare tax applies once earnings pass a high-income threshold.

Because the Social Security portion stops at the wage base, the effective rate falls as income rises above it. An owner with very high profit pays a smaller share of each additional unit of earnings than an owner just below the base.

What reduces the amount of self-employment tax you owe?

Two features soften the load, and both are built into the Schedule SE calculation. First, the tax is computed on a reduced share of net earnings rather than the full amount, which mirrors the employer half being deductible for a wage-paying business. Second, half of the self-employment tax is deducted against income on Schedule 1, an above-the-line deduction that lowers income tax but not the self-employment tax itself.

Ordinary business deductions also reduce it directly, because they reduce net earnings. A retirement plan contribution or a health insurance premium, by contrast, is deducted on the personal return and does not lower self-employment tax.

When does an S-corporation election reduce it, and what are the limits?

Self-employment tax is the tax an S-corporation election is designed to manage. Wages the S-corporation pays its owner carry employment tax under section 3121, but distributions of remaining profit do not, so splitting a reasonable salary from distributions can reduce the total. The election becomes worthwhile above a certain, stable level of profit and not before, because the corporation adds payroll processing, a separate Form 1120-S, and state fees.

The salary has to be reasonable for the work actually performed. Setting it too low to strip the tax is the most common S-corporation examination finding, and the IRS can reclassify distributions as wages with penalties and interest. Lower Social Security earnings also mean a lower future benefit record, a trade-off that belongs in the decision.