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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.
1. Half of Your Self-Employment Tax. When employed, your employer pays half your Medicare and Social Security taxes, and you pay the other half through payroll taxes. When you are self-employed, you must pay all of it, through self-employment tax. However, as your own employer, you are entitled to deduct half of it. Deduction or not, though, self-employment tax can be a big cost for an independent contractor. Knowing how self-employment tax is calculated is important when considering employment versus contracting.