Self-Employment Tax: What It Means for Employers

What it means in practice

What the tax is. Chapter 2 of the Internal Revenue Code, which section 1403 says may be cited as the "Self-Employment Contributions Act of 1954," imposes two taxes on the self-employment income of every individual: a 12.4% old-age, survivors and disability insurance tax and a 2.9% hospital insurance tax. The IRS describes self-employment tax (SE tax) as Social Security and Medicare taxes primarily for people who work for themselves, similar to what is withheld from most wage earners. Employers figure these taxes for employees; self-employed people figure their own on Schedule SE (Form 1040). The Social Security Administration uses the information on Schedule SE to figure benefits. The tax applies no matter how old the person is, even if they already receive Social Security or Medicare.

Why it matters to employers. For an employee, the business withholds the employee share of FICA and pays a matching employer share, as covered under employer payroll taxes. The IRS says that, generally, a business does not have to withhold or pay any taxes on payments to independent contractors. The contractor pays SE tax instead, covering both halves. What the business does owe is information reporting: Publication 15 (2026) says Form 1099-NEC is required for payments of $2,000 or more made in 2026 ($600 for 2025) to people not treated as employees, as explained under Form 1099. Which side of the line a worker falls on is not chosen by contract. Publication 15 says a worker is generally an employee if the business has the right to control what will be done and how, and that if an employer-employee relationship exists, it does not matter what it is called.

Who pays it. IRS Topic 554 lists the people who are self-employed for this purpose: sole proprietors (including independent contractors), partners in a partnership (including members of a multi-member LLC treated as a partnership), and others in business for themselves. Sole proprietors include the member of a single-member LLC that is disregarded for income tax and a member of a qualified joint venture of spouses. Publication 15 adds that direct sellers, qualified real estate agents and certain companion sitters are by law nonemployees, generally treated as self-employed for all federal tax purposes. Publication 334 notes exceptions, including a person under 18 working for a parent and notary public fees.

How net earnings are figured. Section 1402(a) defines net earnings from self-employment as gross income from a trade or business, less the deductions attributable to it, plus a partner's distributive share of partnership business income or loss. The Schedule SE instructions list what is left out, including real estate rentals (unless received as a real estate dealer), most dividends and interest, and gains or losses on capital assets. Profits and losses from two or more businesses are combined, so a loss in one reduces income from another. Under the regular method, Publication 334 says to multiply self-employment earnings by 92.35%. That factor comes from section 1402(a)(12), which allows a deduction equal to net earnings times one-half of the combined 15.3% rate, or 7.65%. If the result is under $400, no SE tax is owed (section 1402(b)(2); Schedule SE, line 4c).

Optional methods for small or negative earnings. Schedule SE also offers farm and nonfarm optional methods that can give Social Security credit, or change credits such as the earned income credit, in a year with a loss or low profit. For 2025, the nonfarm method requires net nonfarm profit under $7,840 and under 72.189% of gross nonfarm income, can be used only five times, and reports at most $7,240 (Publication 334 (2025)).

Coordination with W-2 wages. Section 1402(b)(1) limits self-employment income for the 12.4% tax to the Social Security wage base minus the wages paid to the person during the year. On Schedule SE, line 8a, the person enters total Social Security wages and tips from boxes 3 and 7 of every Form W-2, and only the room left under the base is taxed at 12.4%. The IRS says that if Social Security wages and tips total at least $184,500 for 2026, none of the net earnings owes the 12.4% part, but all of them still owe the 2.9% Medicare part. Each employer, meanwhile, keeps withholding Social Security tax on its own wages up to the taxable wage base; the side business does not change payroll.

Additional Medicare Tax. Section 1401(b)(2) adds a 0.9% tax on self-employment income above $250,000 for a joint return, $125,000 for married filing separately and $200,000 otherwise, and reduces that threshold (not below zero) by wages. The Form 8959 instructions say Medicare wages and self-employment income are combined, and the tax is figured on Form 8959. An employer withholds Additional Medicare Tax only on wages it pays above $200,000 in a calendar year, without regard to filing status or other income (IRS Questions and Answers for the Additional Medicare Tax), so an employee with a side business may owe more than was withheld. The IRS says such a person may request extra income tax withholding on a new Form W-4 or make estimated payments.

Worked example 1: a contractor with no wages. Using the 2026 worksheet in Publication 505 (Worksheet 2-3), a contractor expects $80,000 of net profit and no wages. Net earnings are $80,000 x 0.9235 = $73,880. The Medicare part is $73,880 x 2.9% = $2,142.52. Because $73,880 is below $184,500, the Social Security part is $73,880 x 12.4% = $9,161.12. SE tax is $11,303.64, and the deduction is half, $5,651.82. For comparison, if the same $80,000 were paid as W-2 wages, the employer would withhold 7.65% ($6,120.00) and pay a matching 7.65% ($6,120.00) under the Publication 15 (2026) rates.

Worked example 2: wages plus a side business. A single filer has $180,000 of Social Security and Medicare wages from an employer and $40,000 of net profit from a side business in 2026. Net earnings are $40,000 x 0.9235 = $36,940. Only $4,500 of room remains under the base ($184,500 - $180,000), so the Social Security part is $4,500 x 12.4% = $558.00. The Medicare part is $36,940 x 2.9% = $1,071.26. SE tax is $1,629.26 and the deduction is $814.63. The employer withheld no Additional Medicare Tax because wages stayed under $200,000, but the person's threshold for self-employment income falls to $20,000 ($200,000 - $180,000), so $16,940 x 0.9% = $152.46 of Additional Medicare Tax is owed on Form 8959. That amount is not part of the half deduction under section 164(f).

Church employees and ministers. Publication 517 explains that a church or qualified church-controlled organization opposed for religious reasons to Social Security and Medicare taxes may elect, on Form 8274, to exclude its employees from FICA. The employer then neither pays the employer share nor withholds the employee share; instead, the employees' wages are subject to SE tax if they are $108.28 or more for the year. Section 1402(j) sets a $100 floor for church employee income and does not allow deductions against it. Ministers are treated differently: Publication 517 says earnings for ministerial services are subject to SE tax even when the minister is a church employee, unless the IRS has approved an exemption.

Partners and LLC members. The Schedule SE instructions say partners pay SE tax on their share of certain partnership income and on guaranteed payments, entered from Schedule K-1 (Form 1065). Limited partners include only guaranteed payments for services actually rendered (section 1402(a)(13)). Publication 15 lists payments to general or limited partners as exempt from income tax withholding, Social Security and Medicare taxes, and FUTA, and Publication 541 says guaranteed payments are not subject to income tax withholding. A single-member LLC disregarded for income tax usually reports on the owner's Schedule C, but the IRS says it is treated as a separate entity for employment taxes and must use its own name and EIN to report and pay employment taxes on wages it pays to employees.

S corporation shareholder-employees. The IRS says corporate officers are employees for FICA, FUTA and income tax withholding, and that payments to an officer who performs services are wages even if the officer is also a shareholder. On its S corporation compensation page, the IRS says an S corporation must pay reasonable compensation to a shareholder-employee for services before non-wage distributions may be made, and lists factors such as duties, time devoted to the business and what comparable businesses pay. Payments traced to the shareholder's personal services are wages subject to employment taxes, while payments traced to non-shareholder employees and capital may be non-wage distributions not subject to employment taxes. The IRS cites court decisions, such as David E. Watson, P.C. v. United States (8th Cir. 2012), in which distributions were treated as wages. What counts as reasonable for a given owner is a facts-and-circumstances question this entry does not decide.

When a contractor was really an employee. Publication 15 says an employer that treated an employee as a nonemployee and did not withhold is generally liable for Social Security, Medicare and withheld income tax. Under section 3509, the employer may figure the employee share at reduced rates: 7.44% for Social Security and 1.74% for Medicare (plus 1.5% for income tax) if it filed the required Forms 1099, or 8.68% and 2.03% (plus 3.0%) if it did not, in addition to owing the full employer share. Those rates are not available for intentional disregard, and the employee share paid under section 3509 cannot be recovered from the worker. The worker side changes too: a worker who received an IRS determination, or who meets another reason code, uses Form 8919 to pay only the employee share of Social Security and Medicare (6.2% and 1.45%) on those wages instead of SE tax. Relief programs are covered under independent contractor.

How the tax gets paid. No one withholds SE tax. The IRS says estimated tax covers SE tax as well as income tax, and that individuals, including sole proprietors, partners and S corporation shareholders, generally must make estimated payments, using Form 1040-ES, if they expect to owe $1,000 or more when they file. For 2026, Publication 505 lists due dates of April 15, June 15 and September 15, 2026, and January 15, 2027, moved to the next business day when a date falls on a weekend or legal holiday. For someone who also has a paycheck, the IRS notes that asking the employer to withhold more on Form W-4 can take the place of estimated payments.

Where states differ. SE tax is a federal tax set by the Internal Revenue Code; the rate, wage base and $400 threshold are the same everywhere. What can differ by state is how a worker is classified and what a business must report. As one example, California's Employment Development Department requires a business that must file Form 1099-NEC or 1099-MISC for an individual, sole proprietor or single-member LLC contractor to report that contractor on Form DE 542 within 20 calendar days of paying, or contracting to pay, $600 or more in a calendar year. California's classification test is described under independent contractor.

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