What is Self-Employment Tax?
The 15.3% covering both halves of Social Security and Medicare, owed by people who work for themselves.
When you have a normal job, your employer quietly pays half of your Social Security and Medicare taxes. When you're self-employed you're both parties, so you pay both halves: 15.3% of net self-employment earnings — 12.4% for Social Security, 2.9% for Medicare — on top of income tax.
It's calculated on about 92.35% of your net profit, and the Social Security portion applies only up to an annual wage base that changes each year; the Medicare portion has no cap. You can deduct the employer-equivalent half against your income tax, which softens it without removing it.
The reason it blindsides new business owners is that it comes off before income tax and takes no notice of your bracket. The first year of self-employment is where this is usually discovered, in April, at the worst possible moment — so set aside 25–30% of profit as it lands. Reducing exposure to this tax is also the entire reason the S-corp election exists.
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Definitions from the Business Dog Glossary — educational, occasionally satirical, never financial advice.