What is the Self-employment tax?
The self-employment tax is a federal tax that self-employed individuals must pay on their net earnings from self-employment, consisting of Social Security tax (12.4%) and Medicare tax (2.9%), for a total of 15.3%. Unlike traditional employees who split these taxes with their employers, self-employed individuals pay both the employer and employee portions on business profits of $400 or more reported on Schedule C, Schedule E rental income in certain circumstances, and farming income. The tax applies to earned income from business activities, with an additional 0.9% Medicare tax on high earners. Self-employed individuals can reduce their tax burden through strategies like the Home office deduction and S Corporation elections, while also being able to deduct the employer-equivalent portion when calculating income tax.
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