Financial Glossary
Self-Employment Tax
Self-employment tax is the combined Social Security and Medicare tax owed by people who work for themselves rather than as employees. Because no employer withholds or matches these contributions, the self-employed individual is responsible for both the employee and employer portions, calculated on net earnings using Schedule SE. A portion of the tax paid is deductible when computing adjusted gross income.
Problem & Application
STR operators, campground owners, freelancers, and single-member LLC owners frequently underestimate self-employment tax because it sits on top of regular income tax and is not withheld for them. It is often the single largest reason a profitable side business owes more than expected at filing time. Some owners restructure as an S corporation to change how earnings are taxed, but that decision depends on profit levels and current rules, so check current IRS guidance before acting.
In Short
Self-employment tax is the price of being your own employer, and it applies on top of income tax. Planning for it during the year prevents a painful surprise at filing.