What Is Self-Employment Tax?
Self-employment (SE) tax is the self-employed person's equivalent of payroll taxes. When you are an employee, your employer pays half of your Social Security and Medicare taxes (7.65%) and withholds the other half from your paycheck. When you are self-employed, you pay both halves — a total of 15.3% on net self-employment income up to the Social Security wage base, plus 2.9% on all net SE income above that threshold. SE tax is in addition to income tax — it is calculated on Schedule SE and added to your total tax liability.
2026 SE Tax Rates & Thresholds
| Income Level | Social Security Tax | Medicare Tax | Additional Medicare | Total SE Rate |
|---|---|---|---|---|
| Up to $176,100 | 12.4% | 2.9% | — | 15.3% |
| $176,100–$200,000 (single) | — | 2.9% | — | 2.9% |
| Above $200,000 (single) | — | 2.9% | 0.9% | 3.8% |
Note: The Social Security wage base ($176,100 for 2025) is adjusted annually for inflation. The 0.9% Additional Medicare Tax applies to wages and SE income above $200,000 (single) or $250,000 (MFJ).
SE Tax Deduction
Self-employed individuals can deduct half of their SE tax as an above-the-line deduction on Form 1040. This deduction reduces your adjusted gross income (AGI) but does not reduce your SE tax itself. For a taxpayer with $100,000 in net SE income, the SE tax is approximately $14,130, and the deduction is $7,065. This reduces federal income tax by approximately $1,766 (at the 25% bracket) — a partial offset of the SE tax burden.
California SE Tax Considerations
California does not have a separate SE tax — California income tax applies to all net income including self-employment income. However, California does not allow the federal SE tax deduction on the California return. This means California self-employed taxpayers pay California income tax on a slightly higher base than their federal AGI.
Strategies to Reduce SE Tax
The most effective strategy to reduce SE tax is the S corporation election. By paying yourself a reasonable salary and taking the remainder as distributions, you pay SE taxes only on the salary portion. For a business with $200,000 in net profit and a $100,000 salary, the S corp election saves approximately $15,300 in SE taxes annually. Other strategies include: maximizing deductible business expenses (which reduce net SE income), contributing to a SEP-IRA or Solo 401(k) (which reduce income tax but not SE tax), and structuring income as rental income where possible (rental income is not subject to SE tax).
Retirement Accounts & SE Tax
Self-employed individuals can contribute to a SEP-IRA (up to 25% of net SE income, maximum $70,000 for 2025), a Solo 401(k) (up to $23,500 employee deferral plus 25% employer contribution, maximum $70,000), or a SIMPLE IRA. These contributions reduce income tax but do not reduce SE tax — SE tax is calculated before the retirement contribution deduction. KDA models the optimal retirement contribution strategy for every self-employed client.
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