Self-Employment Tax

Self‑employment (SE) tax is a federal tax that covers Social Security and Medicare contributions for individuals who work for themselves.

Unlike traditional employees, self‑employed individuals pay both the employer and employee portions of these taxes.

🔢 2025 Self‑Employment Tax Rates

✅ Total SE Tax Rate: 15.3%

• 🧓 Social Security: 12.4%
• 🏥 Medicare: 2.9%

➕ Additional Medicare Tax

An extra 0.9% Medicare tax applies to earnings above the following thresholds:

📊 Income Thresholds (2025)

🧓 Social Security Wage Base

• Applies to the first $176,100 of net earnings
• ⏪ Before 2025: Wage base was $168,600

🏥 Medicare Tax

• Applies to all net earnings
• ❌ No income cap

✅ Who Must Pay Self‑Employment Tax

You must pay SE tax if you have:

• 💵 Net self‑employment income of $400 or more, or
• ⛪ Church employee income of $108.28 or more

👥 Includes:

• Freelancers
• Independent contractors
• Sole proprietors
• Partners
• Single‑member LLC owners

🧮 How to Calculate Self‑Employment Tax

1️⃣ Determine Net Earnings

• Gross income − business expenses

2️⃣ Apply IRS Adjustment

• Multiply net earnings by 92.35%
• This simulates the employer‑side deduction

3️⃣ Calculate the Tax

• 🧓 Social Security:
  • 12.4% of adjusted earnings (up to the wage base)
• 🏥 Medicare:
  • 2.9% of adjusted earnings (no cap)
• ➕ Additional Medicare:
  • 0.9% on income above applicable thresholds

4️⃣ Deduct Half of SE Tax

• ✅ You may deduct 50% of your self‑employment tax
• 📉 This deduction reduces Adjusted Gross Income (AGI)

🆕 Recent Updates (OBBBA – 2025)

🧾 New Deductions for Self‑Employed Individuals

💸 No Tax on Tips

• Deduct up to $25,000 in qualified tips
• Applies for 2025–2028
• 📉 Phases out at:
  • $150,000 MAGI (Single)
  • $300,000 MAGI (MFJ)

⏱️ No Tax on Overtime

• Deduct up to $12,500 in qualified overtime pay
• Same MAGI phaseout thresholds as tips

📘 Examples

✅ Example 1: Freelancer

A freelancer earns $80,000 with $20,000 in business expenses.

• Net earnings:
  • $80,000 − $20,000 = $60,000
• Adjusted earnings:
  • $60,000 × 92.35% = $55,410

SE Tax Calculation:

• Social Security: $6,870
• Medicare: $1,607
• ✅ Total SE Tax: $8,477

✅ Example 2: Self‑Employed Hairstylist

A hairstylist earns $50,000 in tips.

• May deduct up to $25,000 under OBBBA
• ✅ Reduces taxable income
• ✅ Lowers self‑employment tax base