Self-Employment Tax Basics


If you own an unincorporated business, you likely pay at least three different federal taxes.  You must also pay Social Security and Medicare taxes.

Self-employment taxes are not insubstantial.  Many business owners pay more in self-employment taxes than in income tax. The self-employment tax consists of

· a 12.4 percent Social Security tax up to an annual income ceiling ($147,000 for 2022) and

· a 2.9 percent Medicare tax on all self-employment income.

These amount to a 15.3 percent tax, up to the $147,000 Social Security tax ceiling. If your self-employment income is more than $200,000 if you’re single or $250,000 if you’re married filing jointly, you must pay a 0.9 percent additional Medicare tax on self-employment income over the applicable threshold for a total 3.8 percent Medicare tax.

You pay the self-employment tax if you earn income from a business you own as a sole proprietor or single-member LLC, or co-own as a general partner in a partnership, an LLC member, or a partner in any other business entity taxed as a partnership.

You don’t pay self-employment tax on personal investment income or hobby income.

The tax code bases your self-employment tax on 92.35 percent of your net business income. That means your business deductions are doubly valuable since they reduce both income and self-employment taxes.  Personal itemized deductions and “above-the-line” adjustments to income don’t decrease your self-employment tax.

Some types of income are not subject to self-employment tax at all, including

· most rental income,

· most dividend and interest income,

· gain or loss from sales and dispositions of business property, and

· S corporation distributions to shareholders.

You calculate your self-employment taxes on IRS Form SE and pay them with your income taxes, including your quarterly estimated taxes.[/vc_column_text][us_image image=”3871″][/vc_column][/vc_row]