Self-Employment Tax
Quick definition
The 15.3% tax on net self-employment income that funds Social Security and Medicare.
Self-employment tax is the self-employed equivalent of FICA payroll tax. It is 15.3% of net self-employment income. 12.4% for Social Security (up to the annual wage base) plus 2.9% for Medicare (no cap).
Why it exists
W-2 employees and their employers each pay 7.65% in payroll tax (totaling 15.3%). Self-employed workers do not have an employer to split with, so they pay the full 15.3% themselves. You DO get to deduct half the SE tax as an above-the-line deduction on Form 1040.
How mileage reduces it
The mileage deduction comes off Schedule C income BEFORE Schedule SE is calculated. So a $5,000 mileage deduction reduces your SE tax by about $765 in addition to whatever federal income tax bracket benefit you get. See the full filing math.
When you owe it
You owe SE tax if you have $400 or more in net self-employment income for the year. Below $400, no SE tax is owed (you may still owe income tax).
Related terms
Schedule SE
The federal form that calculates self-employment tax (Social Security + Medicare) for self-employed workers.
Schedule C
The federal form self-employed workers use to report business income and expenses, including the mileage deduction.
Quarterly Estimated Tax
Four federal tax payments per year that self-employed workers make in lieu of W-2 paycheck withholding.
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