• The Social Security tax is only applied on the first $128,400 of wages but the Medicare tax is unlimited 

• An additional 0.90% Medicare tax is applied on wages over $200,000.  This only affects the employee (and the employer does not have to match this additional tax) 

Self-employed individuals, however, must pay “self-employment” tax (SE tax for short). It requires self-employed individuals to pay the employer AND employee share of the payroll tax on their net earnings from self-employment.

Amount of Tax 

An employee making $150,000 per year pays $10,111 of Social Security and Medicare taxes and her employer pays a like amount for a total of $20,222.  By contrast, a self-employed individual pays SE tax of $20,222 (without an employer contributing to it).   

If an individual has both wages from employment and self-employed income, the wage base ceiling is applied across all income (so as to not disadvantage them relative to others that have a single job).   

Some Good News 

Importantly, 50% of the SE tax (think of it as what would have been employer-funded) is deductible from gross income and can be claimed as a deduction regardless of whether the individual itemizes. This deduction saves the individual 50% of the SE tax times the individual’s marginal tax rate.  It does not make an individual whole (relative to employees), but it does help.  

Net Earnings from Self-Employment 

The SE tax applies to net earnings from self-employment (but only if these are $400 or more). It does not matter whether these net earnings result from an independent contractor, a sole proprietorship, a general partnership and/or a limited liability company (LLC) member (with certain exceptions described below).   

Net earnings is not a cash concept – that is, it does not turn on how much cash was distributed. In particular, you should look to the following lines on the following forms for your net earnings: