What is self-employment tax?
Self-employment tax is the Social Security and Medicare tax paid by self-employed individuals. It totals 15.3% (12.4% Social Security up to the wage base of ~$168,600, plus 2.9% Medicare on all net earnings). It replaces the FICA taxes an employer would otherwise split with an employee.
Why is SE tax calculated on 92.35% of income?
You multiply net self-employment earnings by 92.35% before applying the 15.3% rate. This adjustment accounts for the employer-equivalent portion of the tax, roughly mirroring how an employee is not taxed on the employer's share of FICA.
Can I deduct self-employment tax?
Yes. You can deduct one-half of your self-employment tax as an above-the-line deduction on your federal return. This reduces your income tax (but not the SE tax itself), reflecting the employer-share equivalent.
Do I need to make quarterly estimated payments?
Generally yes. Because no employer withholds tax, the IRS expects self-employed taxpayers to pay estimated tax quarterly if they will owe $1,000 or more. Use the Tax Instalment Estimator to plan the amounts and avoid underpayment penalties.