How Self-Employment Tax Impacts Small Business Owners — and What You Can Do About It

If you run a growing unincorporated business, you’re likely aware of how costly self-employment (SE) tax can be. This tax is how self-employed individuals like you contribute to Social Security and Medicare — but the cost may be higher than you think.

SE Tax Overview

Self-employment tax is 15.3% on net self-employment income up to a certain annual limit. This rate includes:

• 12.4% for Social Security
  
• 2.9% for Medicare
  

For 2025, the full 15.3% rate applies to the first $176,100 of your net SE income. In 2024, the maximum wage base was $168,600.

Income above the threshold is no longer subject to the 12.4% Social Security portion — but the 2.9% Medicare tax continues to apply to all your net SE income, with no cap.

Calculating SE Tax

Here’s how it works:

1. Take your business income (usually reported on Schedule C, Form 1040).
   
2. Multiply it by 0.9235 to calculate your net SE income.
   
3. Then calculate:
   
   • If net SE income is $176,100 or less (for 2025): multiply by 15.3%.
     
   • If it’s more than $176,100:
     
     • Multiply $176,100 by 12.4% (Social Security portion), and
       
     • Multiply your full net SE income by 2.9% (Medicare portion),
       
     • Then add the two amounts together.
       

Example:
If your 2025 net SE income is $200,000:

• Social Security tax = 12.4% × $176,100= $21,836.40
  
• Medicare tax = 2.9% × $200,000 = $5,800
  
• Total SE tax = $27,636.40
  

Future Projections: SE Tax Will Likely Increase

The Social Security wage base — the cap for the 12.4% portion — rises almost every year due to inflation adjustments. Here are projected Social Security tax ceilings from the Social Security Administration (as of 2024):

• 2026: $181,800
  
• 2027: $188,100
  
• 2028: $195,900
  
• 2029: $204,000
  
• 2030: $213,600
  
• 2031: $222,900
  
• 2032: $232,500
  
• 2033: $242,700
  

If these estimates hold, the SE tax on $242,700 of income in 2033 would be $37,133 (15.3% × $242,700).

Note: These projections can change. For example, the 2025 ceiling was previously estimated at $174,900 but was later finalized at $176,100.

More Tax, But Not More Benefits

You might expect that as SE tax thresholds increase, Social Security benefits would increase at the same pace — but that’s not the case.

• 2024 tax ceiling rose 5.24% from 2023
  
• 2024 Social Security benefits only rose 3.2%
  
• 2025 tax ceiling is rising 4.45%
  
• 2025 benefits will only increase 2.5%
  

Why the disconnect? The tax ceiling is adjusted based on average wage growth, while benefit increases are tied to a different inflation measure.

One Strategy: The S Corporation

If you’re concerned about rising SE tax, one option is to restructure your business as an S corporation. Here’s why it can help:

• You pay yourself a reasonable salary (subject to payroll tax),
  
• But the rest of the business income can be distributed as dividends — which aren’t subject to SE tax.
  

This strategy must be implemented correctly and supported by documentation of reasonable compensation, but it can result in meaningful SE tax savings.

Need guidance?
We can help evaluate whether an S corporation election makes sense for your business and explore other ways to manage your self-employment tax burden. Let us know if you’d like to discuss next steps.