Understanding the Self-Employment Tax

You are the owner/operator of a small business with no employees. Your business was formed as a single member LLC; thus, you report your business income/loss on schedule C of your individual tax return. In 2024, your business made a profit. You pick up your returns from your accountant and notice that you owe a significant amount in federal taxes. You think “How can this be? My business was not that profitable.” You examine the return and instantly notice an amount for self-employment tax. Self-employment tax is essentially some of the taxes that would have been withheld from your wages if you were an employee. It consists of Social Security and Medicare taxes. As a self-employed individual you are required to pay both the employee and the employer equivalent portion of Social Security and Medicare taxes. Therefore, the self-employment tax rate is 15.3% (12.4% for Social Security, and 2.9% for Medicare).

You are also required to pay the self-employment tax on the net income (business income minus business expenses) from your business that exceeds $400.00. The tax is figured on schedule SE and filed along with your individual tax return (form 1040). However, you are entitled to deduct up to half of the self-employment taxes in figuring your adjusted gross income. Please keep in mind that this deduction only affects the income tax and not the net earnings from self-employment or the self-employment tax itself.

If you are self-employed and unsure as to whether you have been paying self-employment taxes please contact a tax professional. For more information about this article or if you have any questions, please contact our office.