Self-Employment Tax


DEFINITION of 'Self-Employment Tax'

Money that a small business owner must pay to the federal government to fund Medicare and Social Security. Self-employment tax is due when an individual has net earnings of $400 or more in self-employment income over the course of the tax year. In any business, both the company and the employee are taxed to pay for these two major social welfare programs. When an individual is self-employed, she is both the company and the employee, so she pays both shares of this tax. Self-employment tax is computed and reported on IRS Form 1040, Schedule SE.

BREAKING DOWN 'Self-Employment Tax'

Individuals typically pay self-employment tax on 92.35% of their net earnings, not 100%. Self-employment tax is also a tax-deductible expense. Still, it represents a significant cost of being self-employed. The Social Security component of the self-employment tax phases out once net income reaches the low six figures, but all net income is subject to the Medicare tax. Self-employed individuals must pay self-employment tax as a condition of receiving Social Security benefits upon retirement.

  1. Social Security Tax

    The tax levied on both employers and employees used to fund the ...
  2. Local Tax

    A tax assessed and levied by a local authority such as a county ...
  3. Income Tax

    A tax that governments impose on financial income generated by ...
  4. Indirect Tax

    A tax that increases the price of a good so that consumers are ...
  5. Corporate Tax

    A levy placed on the profit of a firm, with different rates used ...
  6. Payroll Tax

    Tax an employer withholds and/or pays on behalf of their employees ...
Related Articles
  1. Stock Analysis

    Are You Ready for Uber's IPO? 2 Things to Consider

    Learn why ongoing litigation from drivers along with state and local governments could put a damper on what is likely an impending Uber IPO.
  2. Entrepreneurship

    10 Tax Benefits For The Self-Employed

    Running your own business has both personal and financial perks.
  3. Entrepreneurship

    Top 4 Financial Jobs You Can Do From Home

    You don't have to go to an office to make a great salary in the financial sector. Here are the top four highest paying financial jobs you can do from home.
  4. Entrepreneurship

    Should You Incorporate Your Business?

    Find out how becoming a corporation can protect and further your finances.
  5. Options & Futures

    Self Employed? 5 Steps To Scoring A Mortgage

    Convince lenders that you're a good bet despite your lack of a steady income.
  6. Taxes

    3 Common Tax Questions Answered

    We clarify some rules that often puzzle taxpayers.
  7. Options & Futures

    Surviving On An Irregular Income

    Being self-employed provides freedom, but only if you learn to make your money last.
  8. Entrepreneurship

    Plans The Small-Business Owner Can Establish

    Don't hesitate to adopt a smart plan for you and your employees.
  9. Professionals

    How Advisors Can Carve Out a Social Media Niche

    Social media is a great way for financial advisors to build a brand and potentially generate leads if it’s properly used. Here are some tips.
  10. Investing

    How Aliko Dangote Became the Richest African

    An overview of how Aliko Dangote turned a local commodities trading business into a billion-dollar conglomerate.
  1. What is the difference between MAGI (modified adjusted gross income) and adjusted ...

    Calculating personal income tax correctly involves understanding two important tax terms: adjusted gross income (AGI) and ... Read Full Answer >>
  2. How much money can Uber drivers make?

    According to the company’s own data released in May 2014, more than half of the Uber drivers operating in New York City earn ... Read Full Answer >>
  3. Is there any way to opt out of paying Social Security?

    Exemptions from the Social Security program exist for a small number of groups. These individuals are not responsible for ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. In what instances does overhead qualify for certain tax allowances?

    Businesses are just as keen as anyone else to keep their tax burdens low by any means possible. Overhead expenses often qualify ... Read Full Answer >>
  6. How are write-offs recorded on my tax return?

    The way your write-offs are recorded on your tax return varies depending on whether you are filing a personal or business ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  2. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  3. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  4. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  5. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  6. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!