What Is Self-Employment Tax? (And Why Is It So High?)

The thing nobody warned you about

When people go from a W-2 job to self-employment, the first April is usually a shock. They expected to pay income tax. They didn’t expect to pay another 15.3% on top of it.

That 15.3% is self-employment tax, and it exists because of how Social Security and Medicare work. Here’s the setup:

At a regular job, you pay 7.65% for Social Security and Medicare (taken out of your paycheck) and your employer pays another 7.65% on top of your salary. You never see the employer half — it just disappears before your paycheck arrives.

When you’re self-employed, you are both the employee and the employer. So you pay both halves: the 7.65% you would have paid as an employee plus the 7.65% your employer would have paid. Total: 15.3%.

The actual breakdown

Self-employment tax has two components:

• Social Security: 12.4% — applies up to the Social Security wage base (the IRS adjusts this number every year for inflation). Once your net SE income crosses that threshold for the year, no more Social Security tax on the excess.
• Medicare: 2.9%— applies to all net self-employment income. No cap. If you earn above $200,000 (single) or $250,000 (married filing jointly), there’s an additional 0.9% Medicare surtax on the amount above those thresholds.

SE tax applies to your net profit — revenue minus deductible business expenses. Not your gross revenue. This is why tracking expenses matters: every deductible expense reduces SE tax, not just income tax.

What this looks like in dollars

Let’s put actual numbers on it. Say you had $90,000 in net self-employment income last year.

• SE tax: $90,000 × 15.3% = $13,770
• SE tax deduction: $13,770 ÷ 2 = $6,885 deducted from gross income
• Net SE income after deduction: $90,000 − $6,885 = $83,115
• Income tax then applies to $83,115 (plus any other income)

So on $90,000 in net profit, you’re paying $13,770 in SE tax beforea dollar of income tax. At a 22% marginal rate, add roughly $18,000 more in income tax. Total tax burden: around $32,000 on $90,000 in profit. That’s why the recommendation is to save 30–35% of every payment for taxes.

When quarterly payments matter

SE tax isn’t withheld from anything during the year — you calculate and pay it annually on Schedule SE. But the IRS expects you to pay in throughout the year via quarterly estimated taxes. If you wait until April to pay the full amount, you’ll likely owe a small underpayment penalty.

The quarterly due dates are approximately April 15, June 15, September 15, and January 15. The safest approach: set aside 30–35% of every payment you receive, and send quarterly estimates based on that savings.

The S-corp solution

Once your net profit gets above roughly $50,000–$80,000 per year, an S-corp election can reduce your SE tax meaningfully. Here’s how it works:

With an S-corp, you split your business income into two buckets:

1. W-2 salary— you pay yourself a “reasonable compensation” wage. This is subject to payroll taxes (both employee and employer sides — effectively SE tax on the salary portion).
2. Distributions — profits above your salary pass through to you as distributions. Distributions are not subject to SE tax.

Example: $150,000 in net profit. As a sole prop or LLC, all $150,000 is subject to 15.3% SE tax. As an S-corp with a $70,000 salary, only the $70,000 salary is subject to payroll taxes — the remaining $80,000 in distributions is not. SE tax savings: roughly $80,000 × 15.3% = $12,240. Subtract payroll processing costs of $1,500–$2,000/year, and you’re saving about $10,000.

Below around $50,000–$60,000 in net profit, the math usually doesn’t work — the payroll costs and complexity eat up most of the savings. Use the entity structure analyzer to run your specific numbers.