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When figuring self-employment tax you owe, you get to reduce self-employment income by half of the self-employment tax before applying the tax rate. Say, for example, that your net self-employment income is $50,000. That's the amount you report as taxable for income tax purposes on Form 1040. But when figuring your self-employment tax on Schedule SE, Computation of Social Security Self-Employment Tax, the taxable amount is $46,175. Not paying the 15.3 percent tax on $3,225 difference in this example saves you $493.
How to Plan for, Minimize, and Report the Self-Employment Tax. The Self-Employment Tax is how an independent contractor pays Social Security and Medicare payroll taxes. In the case of an employee, the employer and employee split the cost of Social Security and Medicare taxes, each paying 7.65% of eligible wages. An independent contractor, by contrast, is both the employer and the employee, so a self-employed person pays both halves, or 15.3% total. The 15.3% self-employment tax is composed of a 12.4% Social Security tax on the first $127,200 of net self-employment income for the year 2017, and a Medicare tax of 2.9% on all net self-employment income.