Quarterly & Income Tax
Self-Employment Tax: What It Is and How to Reduce It
Short answer
Self-employment (SE) tax is 15.3% on your business's net profit — 12.4% for Social Security and 2.9% for Medicare. It is on top of federal income tax. It exists because you are paying both halves of payroll tax that an employer would normally split with you.
SE tax is the biggest surprise for first-year self-employed filers. You can be in the 12% income-tax bracket and still owe over 25% total once SE tax is added. Knowing how it works lets you plan — and legally reduce it.
How it is calculated
Take net profit from Schedule C. Multiply by 92.35% (this accounts for the employer-half deduction). Multiply the result by 15.3%. That is your SE tax.
Half of your SE tax is deductible from your adjusted gross income — softening the income-tax side slightly.
Legal ways to reduce it
- Track every legitimate business expense — every $100 of expense saves ~$15 of SE tax plus income tax
- Contribute to a SEP-IRA or Solo 401(k) — reduces income tax (not SE tax) but compounds savings
- Consider electing S-Corp taxation once profit exceeds ~$60k — reasonable salary is subject to payroll tax, distributions are not
- Hire your spouse legitimately and pay reasonable wages — splits SE base in some structures
Frequently asked questions
Does an LLC avoid SE tax?
No. A single-member LLC is taxed as a sole prop by default — all net profit is subject to SE tax. The savings come from electing S-Corp status, not from the LLC itself.
When does S-Corp make sense?
Once net profit is consistently $60–80k+. Below that, the added payroll and accounting cost usually wipes out the SE-tax savings.
Tax-ready records, automatically.
Glo Invoice tags every expense and 1099 contractor so tax time is a download, not a scramble.
Sources & further reading
Primary sources we consulted when writing and reviewing this guide.