Self-employment tax is 15.3% on top of income tax. Learn exactly how it is calculated, what reduces it, and when an S-Corp election makes financial sense for high-earning freelancers.
When you are an employee, your employer pays half of Social Security and Medicare taxes (7.65%) and withholds the other half from your paycheck. When you are self-employed, you pay both halves: 15.3% self-employment tax on the first $168,600 of net self-employment income (2024), plus 2.9% Medicare on income above that.
Step 1: Calculate net self-employment income
Gross revenue - Business expenses = Net self-employment income
Step 2: Multiply by 92.35%
This accounts for the employer-equivalent deduction. $100,000 net income x 0.9235 = $92,350.
Step 3: Calculate SE tax
$92,350 x 15.3% = $14,129.55
Step 4: Deduct half of SE tax from income
You can deduct half the SE tax ($7,064.78) from your adjusted gross income on Form 1040.
S-Corporation election: At income above approximately $50,000-60,000, structuring as an S-Corp and paying yourself a reasonable salary can reduce SE tax. The salary portion pays SE tax but distributions do not. This requires working with an accountant.
QBI deduction: The Qualified Business Income deduction allows up to 20% of qualified business income to be deducted from taxable income. Does not reduce SE tax but reduces income tax.
Retirement contributions: SEP-IRA and Solo 401(k) contributions reduce net self-employment income and therefore reduce SE tax.
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