If you own a growing, unincorporated business—whether you’re a freelancer, consultant, or sole proprietor—self-employment tax (SE tax) is probably a major part of your annual tax burden. Unlike W-2 employees who split Social Security and Medicare taxes with their employer, self-employed individuals are responsible for paying the full share themselves.
Understanding how the SE tax works, how much you owe, and how to reduce your liability is essential to maintaining cash flow and long-term profitability. In this guide, we’ll explain the mechanics of SE tax, provide future projections, and offer strategies to make it more manageable—especially as your business scales.
What Is Self-Employment Tax?
Self-employment tax is the combination of Social Security and Medicare taxes that self-employed individuals must pay. According to the IRS, the current SE tax rate is 15.3%:
- 12.4% for Social Security (on income up to a limit)
- 2.9% for Medicare (on all income)
For 2025, the Social Security portion applies to the first $176,100 of net self-employment income. After that, only the Medicare portion continues, and for high earners, an additional 0.9% Medicare surtax applies to income over $200,000 (single) or $250,000 (married filing jointly).
Self-employment tax is calculated using Schedule SE of Form 1040 and is based on 92.35% of your self-employment income (this adjusts for the employer-equivalent portion of your contribution).
Real-World Example
Let’s say you’re a sole proprietor expecting to earn $200,000 in net self-employment income in 2025.
- Net SE Income Adjustment: $200,000 × 0.9235 = $184,700
- Social Security Tax: 12.4% of $176,100 = $21,852
- Medicare Tax: 2.9% of $200,000 = $5,800
- Total SE Tax: $27,652
If you’re subject to the additional 0.9% Medicare surtax, that would be 0.9% × $0 (no income above $200,000) = $0.
That’s over $27,000 in SE tax alone—before factoring in income tax, state taxes, or any deductions.
The Future of Self-Employment Tax: Social Security Projections
According to projections from the Social Security Administration (SSA), the Social Security wage base is expected to keep rising—meaning a greater portion of your income could be subject to the 12.4% tax.
Here are the projected wage bases for the next several years:
- 2026 – $181,800
- 2027 – $188,100
- 2028 – $195,900
- 2029 – $204,000
- 2030 – $213,600
- 2031 – $222,900
- 2032 – $232,500
- 2033 – $242,700
If these projections hold, by 2033, the SE tax on $242,700 of income would total $37,133. And because the Social Security ceiling increases faster than benefits, the disconnect between taxes paid and benefits received continues to grow.
Tax Ceilings vs. Benefit Increases: A Frustrating Disconnect
A common misconception is that higher SE tax payments result in proportionally higher Social Security benefits. That’s not the case. The Social Security tax ceiling is based on average wage growth, while benefit increases (COLAs) are tied to inflation.
For example:
- The 2024 wage base increased by 5.24% over 2023
- But benefits increased by only 3.2%
- In 2025, the wage base is up 4.45%, while benefits rise just 2.5%
This discrepancy means that high-income self-employed taxpayers are paying significantly more in tax, without a matching increase in benefits.
Strategies to Reduce SE Tax: S Corporation Setup
One of the most common self-employment tax reduction strategies is forming an S corporation. Instead of paying SE tax on all business income, S corp owners pay themselves a reasonable salary (which is subject to payroll taxes) and receive the rest as distributions, which are not subject to SE tax.
Example:
Your business earns $200,000. You pay yourself a salary of $80,000 and take $120,000 as a distribution. Only the salary is subject to SE tax—saving you thousands annually.
Just remember:
- The IRS requires that salaries be “reasonable”
- You’ll need to run payroll and file additional corporate tax forms
This approach isn’t right for everyone, but for growing businesses, the savings can be substantial.
SE Tax vs. W-2 Payroll Tax: A Side-by-Side Look
| Category | Self-Employed | W-2 Employee |
| Who Pays Social Security | You pay full 12.4% | Split: 6.2% by employer, 6.2% by employee |
| Who Pays Medicare | You pay full 2.9% (plus 0.9% if applicable) | Split: 1.45% by employer, 1.45% by employee |
| Deductibility | 50% of SE tax deductible | Payroll tax not deductible |
| Additional Forms | Schedule C, SE, 1040 | W-2, 1040 |
| Flexibility for Deductions | High (business expenses, QBI, entity type) | Limited to standard or itemized |
How to Calculate Self-Employment Tax
Here’s a quick formula to estimate your SE tax:
- Multiply your net business income by 0.9235
(this gives you net SE income) - Apply the tax rates:
– 12.4% on the first $176,100 (2025 limit)
– 2.9% on all net SE income
– 0.9% additional Medicare surtax if over $200,000/$250,000
Example Recap:
Net income = $200,000
Adjusted net SE income = $200,000 × 0.9235 = $184,700
Social Security tax = 12.4% of $176,100 = $21,852
Medicare tax = 2.9% of $200,000 = $5,800
Total SE tax = $27,652
The QBI Deduction: Another Way to Lower Taxable Income
Under the Tax Cuts and Jobs Act, self-employed individuals may qualify for the Qualified Business Income (QBI) deduction, which allows you to deduct up to 20% of net business income from taxable income.
According to Nolo, the deduction phases out for high earners but remains one of the most powerful tools for reducing income tax—not SE tax directly, but your overall liability.
Key Requirements:
- Must have qualified pass-through income
- Deduction subject to phaseouts and wage limits
- Doesn’t reduce SE tax, but lowers income tax
Don’t Forget Estimated Tax Payments
One of the biggest adjustments for new self-employed individuals is making quarterly estimated tax payments. Since taxes aren’t withheld from your income like they are for W-2 employees, the IRS expects you to pay throughout the year.
Due Dates for 2025 Estimated Payments:
- Q1: April 15, 2025
- Q2: June 16, 2025
- Q3: September 15, 2025
- Q4: January 15, 2026
What to Pay:
Your estimated payments should include:
- Income tax
- Self-employment tax
Failing to make these payments can result in underpayment penalties, even if you pay in full at the end of the year. Use IRS Form 1040-ES or work with a tax professional to calculate your quarterly amounts. Tip: Setting aside 25–30% of your net income for taxes is a generally good rule of thumb.
Common Myths About Self-Employment Tax
“I only have to pay SE tax if I make more than $100,000.”
False. You must pay SE tax on net income over $400. That means even part-time freelancers may owe SE tax.
“If I pay estimated taxes, I won’t owe SE tax.”
Misleading. Estimated taxes include SE tax, but if you underpay or miscalculate, you may still owe when you file.
“Forming an LLC protects me from SE tax.”
Not directly. An LLC is a legal structure, not a tax classification. Unless taxed as an S corp, LLC income is still subject to SE tax.
Summary: Navigating SE Tax with Confidence
- The self-employment tax rate is 15.3% on the first $176,100 in 2025.
- Above that threshold, the 2.9% Medicare tax continues, with an added 0.9% for high earners.
- The SE tax burden can be managed through thoughtful planning:
- Structuring as an S corp
- Taking advantage of the QBI deduction
- Keeping detailed expense records
- Social Security tax ceilings are rising faster than benefits, resulting in increased long-term costs.
Whether you’re new to self-employment or preparing for another year of growth, the best way to stay ahead is to work with professionals who understand the landscape.
Sorren is here to help. Let’s plan your next move, together.
Self-Employment Tax FAQ
Q: Do I pay SE tax in addition to income tax?
Yes. SE tax covers Social Security and Medicare, while income tax is based on your total earnings minus deductions.
Q: Can I deduct SE tax?
Partially. You can deduct 50% of your SE tax as an income tax adjustment (not a business deduction).
Q: What forms do I need?
– Schedule C to report business income
– Schedule SE to calculate SE tax
– Form 1040 to file your return
– If incorporated: Form 1120-S for S corps
Q: Can I avoid SE tax entirely?
No—but you can reduce it using strategies like forming an S corp or leveraging deductions like QBI.
© 2025
