Self-Employment Tax
Self-employment (SE) tax is the Social Security and Medicare tax owed by self-employed individuals, who must pay both the employee and employer share of these payroll taxes because they have no employer to remit the employer portion on their behalf.
For 2024, the SE tax rate is 15.3 percent on net self-employment income up to the Social Security wage base ($168,600) and 2.9 percent on all net SE income above that threshold. An additional Medicare surtax of 0.9 percent applies to SE income above $200,000 for single filers ($250,000 for joint filers). The effective combined Medicare rate for high earners is therefore 3.8 percent, which equals the net investment income tax rate on passive investment income.
Net self-employment income is calculated on Schedule SE as 92.35 percent of gross SE income (net profit from Schedule C or a partnership). The 7.65 percent haircut approximates the employer's share of FICA taxes, which is deductible as a business expense for employees. Self-employed taxpayers then deduct one-half of their SE tax (the employer-equivalent portion) from gross income as an above-the-line deduction on Form 1040, partially restoring parity with employees.
The SE tax is separate from income tax and is not eliminated by the Foreign Earned Income Exclusion, meaning US citizens living abroad who earn self-employment income still owe SE tax even if their income is exempt from income tax under the FEIE. Some bilateral totalization agreements — similar to tax treaties but focused on social insurance — allocate self-employment taxes exclusively to one country, potentially providing relief.
S corporation owners often use salary-distribution strategies to manage SE tax exposure, paying themselves a reasonable compensation (subject to payroll taxes) while taking additional profit as a distribution (not subject to SE tax). This strategy is permissible but must be carefully documented to withstand IRS scrutiny that the salary is genuinely reasonable.