If you own a growing, unincorporated small business, you might find self-employment (SE) tax bills to be a significant concern. The SE tax ensures that Social Security and Medicare taxes are 
paid by self-employed individuals like you.
How SE Tax Works
The SE tax rate for 2024 is 15.3%, applying to the first $168,600 of your net SE income. This rate includes:
- 12.4% for Social Security
- 2.9% for Medicare
For 2025, this ceiling rises to $176,100. Beyond these thresholds, the 12.4% Social Security portion does not apply, but the 2.9% Medicare tax continues on all income.
Calculating Your SE Tax
To determine your SE tax:
- Take your taxable income from self-employment (e.g., from Schedule C of Form 1040) and multiply by 0.9235 to find your net SE income.
- If your net SE income is $168,600 or less (2024), multiply by 15.3%.
- For income over $168,600, calculate the Social Security tax on $168,600 (12.4%) and the Medicare tax on the full amount (2.9%). Add the results for your total SE tax.
Example:
If your net SE income for 2024 is $200,000, your SE tax will be $26,706:
- Social Security Tax: $168,600 × 12.4% = $20,906
- Medicare Tax: $200,000 × 2.9% = $5,800
For more details on SE tax rates and rules visit the IRS SE tax page.
Future Projections: Rising Costs Ahead
Social Security tax ceilings are expected to increase annually due to inflation adjustments, impacting future SE tax bills. Projections from the Social Security Administration (SSA) suggest the following ceilings:
- 2026: $181,800
- 2027: $188,100
- 2028: $195,900
- 2033: $242,700
For instance, if the 2033 ceiling of $242,700 applies, the SE tax on that income would be $37,133.
Disconnect Between Tax Ceilings and Benefits
Social Security tax ceiling increases don’t align with benefit increases. For example, while the 2024 tax ceiling is 5.24% higher than 2023, Social Security benefits only rose by 3.2%. The disparity arises because tax ceilings are tied to wage growth, while benefit increases depend on inflation.
Reducing SE Tax with an S Corporation
One potential strategy to manage SE tax is converting your business into an S corporation. By paying yourself a reasonable salary and distributing the remaining cash flow as dividends, only your salary would be subject to Social Security and Medicare taxes.
If you have questions about SE tax or strategies to reduce your tax burden, feel free to contact us for assistance.
