What is Self-Employment Tax?
Definition Self-employment tax covers the Social Security and Medicare taxes owed by people who work for themselves, roughly 15.3 percent on net self-employment earnings up to the annual Social Security wage base, plus the Medicare portion above it. It exists because self-employed workers pay both the employee and employer shares that a job would normally split. Half of it is deductible in figuring income tax.
It is often a bigger surprise than income tax for new business owners, and strategies like an S election are frequently used to reduce it.