What self-employment tax is
SE tax is the self-employed person's version of FICA. Employees pay 7.65% and their employer pays 7.65%. Self-employed pay both halves: 12.4% Social Security on the first $168,600 of net earnings (2025 cap) plus 2.9% Medicare on all earnings, plus an additional 0.9% Medicare above $200K single / $250K MFJ.
Schedule C mechanics
Income and expenses from self-employment go on Schedule C. Net profit flows to Schedule SE (which calculates SE tax) and Schedule 1 (which feeds into AGI on the main 1040).
The deduction for half of SE tax
You deduct half of SE tax (the 'employer portion') as an above-the-line adjustment. This deduction goes on Schedule 1 and reduces your AGI, not just your taxable income.
Quarterly estimates
Because there's no employer withholding, you make quarterly estimated payments on Form 1040-ES. Due April 15, June 15, September 15, January 15. Safe harbor is 90% of current or 100% of prior year (110% if prior AGI was over $150K).
S-corp election as SE tax savings
Electing S-corp treatment splits your income into reasonable salary (SE/payroll tax applies) and distributions (no SE tax). Typical break-even is around $45,000–$60,000 in net income.
Retirement plan options
Self-employed retirement accounts let you defer substantial income:
- Solo 401(k): up to $70,000 total (2025), Roth option available
- SEP-IRA: up to 25% of net SE earnings, capped at $70,000 (2025)
- SIMPLE IRA: up to $16,500 employee + 3% match
- Defined benefit: can exceed $300K/year at older ages and high income
Common questions
- Can I avoid SE tax by classifying income as rental or investment?
- Not through reclassification. If you provide substantial services (e.g. short-term rental with hotel-like services), it's self-employment income regardless of what you call it.
- What about Self-Employed Health Insurance?
- Premiums for health insurance (including Medicare post-65) are deductible above the line, up to net SE earnings. Reduces both income tax and AGI but not SE tax.