Self-Employment Tax

Self-employment tax is how sole proprietors, general partners, and most active LLC members pay Social Security and Medicare: 15.3% on net self-employment earnings, composed of 12.4% Social Security up to the annual wage base and 2.9% Medicare with no cap, plus an extra 0.9% Medicare surtax above $200,000 ($250,000 joint). The tax applies to 92.35% of net business profit, and half of the tax is deductible above the line. It exists because there is no employer paying the other half of FICA, so the owner pays both sides. Self-employment tax is frequently a bigger bill than income tax for profitable freelancers, and it is the tax the S corporation structure targets: profits taken as S corporation distributions escape it, while sole proprietorship profits never do.