What is the self-employment tax rate?
The self-employment tax rate is 15.3% on net earnings from self-employment. This breaks down to 12.4% for Social Security and 2.9% for Medicare. If you’re a sole proprietor, partner, or independent contractor, this is the tax that replaces the FICA contributions employees and employers typically split.
When you work as an employee, 7.65% comes out of your paycheck and your employer pays another 7.65% separately. Self-employed people cover both sides, paying the full 15.3%. This often catches new business owners off guard during their first tax season because it feels like a much bigger hit than what they saw withheld as employees.
The Social Security portion has a wage base limit that adjusts annually. For 2024, you only pay the 12.4% on the first $168,600 of net self-employment income. Anything above that threshold only gets the 2.9% Medicare tax. High earners also face an additional 0.9% Medicare surtax on self-employment income exceeding $200,000 for single filers or $250,000 for married filing jointly.
There’s a partial offset built into the tax code. You can deduct half of your self-employment tax when calculating adjusted gross income. This reduces your income tax even though it doesn’t reduce the SE tax itself. The deduction exists because employers get to deduct their share of FICA as a business expense, and this puts self-employed people on somewhat closer footing.
Understanding this rate matters for cash flow planning throughout the year. Small business tax preparation involves more than just filing returns. You need to make quarterly estimated payments if you expect to owe $1,000 or more, and missing those deadlines means penalties on top of the tax you already owe.
Some business owners reduce their self-employment tax exposure through entity selection. Operating as an S corporation lets you pay yourself a reasonable salary subject to regular payroll taxes while taking additional profits as distributions that aren’t subject to SE tax. This approach isn’t right for every business, and the decision involves factors beyond just SE tax savings. But for businesses in the Treasure Valley generating consistent profits above what a reasonable owner salary would be, it’s a conversation worth having.
The Treasure Valley's Tax and Accounting Team
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