Self-Employment Tax

How does it work?

Social Security and Medicare taxes are paid to the IRS either as payroll tax or self-employment tax. Your employer withholds payroll taxes from your W-2 wages and remits both the employee and employer match to the IRS.

Sole proprietors, in business for themselves, are considered self-employed and are not permitted to pay themselves wages. Therefore, they have no way to withhold payroll taxes in the conventional manner. In this situation, the self-employment tax on net earnings is paid in lieu of payroll tax. This is remitted to the IRS by calculating and reporting the tax on Form 1040 along with Schedule SE.

What types of income apply?

There are several types of income which trigger the requirement to pay self-employment tax. Some include:

  • Sole proprietor of a non-farm business reported on Schedule C
  • Sole proprietor of a farm business reported on schedule F
  • Owner of a Single Member LLC reported on Schedule C
  • Employees of churches granted exemption from employer payroll taxes

Currently, the self-employment income tax rate is 15.3% of net earnings from self-employment of $400 or more. The 15.3% tax is reported on your Form 1040 tax return in addition to your regular income tax. You may be able to lower your income tax by taking a deduction of up to one-half the amount of your self-employment tax as an adjustment to income.