Self-Employment Tax Calculation

Self-employment (SE) tax is how self-employed individuals pay into Social Security and Medicare. Unlike W-2 employees who split FICA taxes with their employer, self-employed individuals must pay both halves—making this a significant tax obligation that EA candidates must master.

What Is Self-Employment Tax?

Self-employment tax consists of two components that mirror FICA taxes:

Self-employed individuals pay the combined 15.3% because they are considered both employee AND employer. This is calculated and reported on Schedule SE (Form 1040).

Who Pays Self-Employment Tax?

SE tax applies to individuals with net earnings from self-employment of $400 or more:

• Sole proprietors (Schedule C filers)
• General partners in partnerships (their distributive share)
• LLC members (treated as sole proprietors or partners for tax purposes)
• Independent contractors receiving 1099-NEC income
• Ministers and members of religious orders (with some exceptions)
• Farmers (Schedule F filers)

Not Subject to SE Tax:

• Limited partners (generally only receive passive income)
• S corporation shareholders receiving distributions (not wages)
• Rental income (passive income, with certain exceptions for real estate professionals)

The 92.35% Multiplier Explained

Here's where many students get confused. You don't pay SE tax on 100% of your net self-employment income—you pay on 92.35% of it.

Why 92.35%? This adjustment accounts for the "employer half" of FICA. Regular employees don't pay income tax on their employer's FICA contribution. To put self-employed individuals on equal footing, the tax code allows them to calculate SE tax on only 92.35% of net earnings.

The math: 100% - 7.65% = 92.35%

This is essentially a built-in deduction that recognizes self-employed individuals shouldn't have to pay SE tax on the equivalent of the employer's share.

2024 Social Security Wage Base

For 2024, the Social Security wage base is $168,600. This means:

• The 12.4% Social Security tax applies only to the first $168,600 of combined wages and self-employment income
• Once combined earnings exceed $168,600, only the 2.9% Medicare tax continues to apply
• There is no cap on Medicare tax—it applies to all earnings

Critical Point: If you have both W-2 wages AND self-employment income, your W-2 wages count first toward the $168,600 cap.

Additional Medicare Tax (0.9%)

High earners face an extra 0.9% Medicare tax on SE income exceeding threshold amounts:

This Additional Medicare Tax brings the total Medicare rate to 3.8% (2.9% + 0.9%) on income above these thresholds.

Step-by-Step SE Tax Calculation

Let's walk through the calculation using Schedule SE:

Step 1: Determine Net Earnings Start with net profit from Schedule C (or Schedule F for farmers, or your distributive share from partnerships).

Step 2: Apply the 92.35% Factor Multiply net earnings by 0.9235 to get "net earnings from self-employment."

Step 3: Calculate Social Security Tax Apply 12.4% to the lesser of:

• Net earnings from self-employment, OR
• $168,600 minus any W-2 wages already subject to Social Security

Step 4: Calculate Medicare Tax Apply 2.9% to ALL net earnings from self-employment (no cap).

Step 5: Calculate Additional Medicare Tax (if applicable) Apply 0.9% to SE income exceeding the threshold for your filing status.

Step 6: Add Components Total SE Tax = Social Security Tax + Medicare Tax + Additional Medicare Tax (if any)

Detailed Calculation Example

Scenario: Maria is single with $95,000 net profit from her consulting business (Schedule C, Line 31). She has no W-2 income.

Maria's total self-employment tax is $13,423 (rounded).

Combined Employment and SE Income Example

Scenario: David works a W-2 job earning $150,000 and has side consulting income of $50,000 (net). He files single.

Because David already paid Social Security tax on $150,000 of wages, only $18,600 of his SE income is subject to Social Security tax. However, all his SE income is still subject to Medicare tax.

The 50% SE Tax Deduction

One of the most important concepts: you can deduct 50% of your SE tax as an adjustment to income on Schedule 1, Line 15.

Using Maria's example:

• SE Tax: $13,423
• Deduction: $13,423 x 50% = $6,712

This deduction:

• Reduces Adjusted Gross Income (AGI)—it's an "above-the-line" deduction
• Is available whether you itemize or take the standard deduction
• Does NOT reduce net earnings subject to SE tax (it's calculated after SE tax)
• Represents the "employer equivalent" portion that employers deduct as a business expense

Schedule SE Overview

Schedule SE has two parts—use the appropriate section based on your situation:

Section A - Short Schedule SE Use if:

• Your only SE income is from Schedule C or F
• You don't have church employee income
• Your total wages and tips are under $168,600

Section B - Long Schedule SE Use if:

• You have church employee income
• You use the optional methods to calculate SE tax
• Your situation is more complex

Most self-employed individuals can use the Short Schedule SE.

Special Rules and Exceptions

Optional Methods: Taxpayers with low net earnings or losses may use optional methods to pay into Social Security:

• Farm Optional Method: Use if gross farm income is $9,840 or less, OR net farm profits are less than $7,107
• Nonfarm Optional Method: Use if net nonfarm profits are less than $7,107 and less than 72.189% of gross nonfarm income

Church Employees: Ministers and certain church employees may have special rules and exemptions.

Deferral: Under the CARES Act provisions (now expired for new deferrals), some SE tax could be deferred. This is no longer available for 2024.

Schedule SE Flows to Form 1040

Understanding how SE tax integrates with Form 1040:

1. Schedule SE, Line 12 (Total SE Tax) → Schedule 2, Part II, Line 4
2. Schedule 2, Line 21 → Form 1040, Line 23 (Other Taxes)
3. Schedule SE, Line 13 (50% Deduction) → Schedule 1, Part II, Line 15
4. Schedule 1, Line 26 → Form 1040, Line 10 (Adjustments to Income)

EA Exam Tips

Common Exam Traps:

• Forgetting to apply the 92.35% multiplier before calculating SE tax
• Applying Social Security tax above the wage base
• Forgetting that W-2 wages count first toward the $168,600 cap
• Confusing SE tax (15.3%) with self-employment income tax (income tax rates)
• Forgetting the 50% SE tax deduction reduces AGI, not SE earnings

Key Numbers for 2024:

• SE tax rate: 15.3%
• Social Security rate: 12.4%
• Medicare rate: 2.9%
• SE earnings multiplier: 92.35%
• Social Security wage base: $168,600
• Additional Medicare threshold (single): $200,000
• Additional Medicare threshold (MFJ): $250,000
• Minimum SE earnings to file: $400
• SE tax deduction: 50%

Calculation Shortcut: For SE income well under $168,600 with no W-2 wages: SE Tax = Net Profit x 0.9235 x 0.153 = Net Profit x 0.1413 (approximately 14.13%)

This quick calculation helps verify your work: $95,000 x 0.1413 = $13,424 (close to our detailed calculation of $13,423).