SE Tax Base (92.35%)
Self-employment tax is calculated on 92.35% of net self-employment income, not the full amount. This adjustment mirrors the fact that employees do not pay FICA on the employer's share.
When calculating self-employment tax, the IRS does not apply the 15.3% rate to your full net self-employment income. Instead, you first multiply your net earnings by 92.35% (100% minus 7.65%). This reduced amount is called the SE tax base.
The reasoning behind this adjustment is fairness with W-2 employees. Employees pay FICA only on their wages, not on the employer's matching FICA contribution. By reducing the self-employment base to 92.35%, the IRS approximates this same treatment for the self-employed.
For example, if you have $100,000 in net self-employment income, your SE tax base is $92,350. Self-employment tax would be $92,350 multiplied by 15.3%, equaling $14,129.55. You then get to deduct half of that ($7,064.78) as an above-the-line deduction on your income tax return.
Related Terms
Self-Employment Tax
The combined Social Security (12.4%) and Medicare (2.9%) tax paid by self-employed individuals — effectively both the employee and employer shares of FICA, totaling 15.3%.
FICA
Federal Insurance Contributions Act taxes that fund Social Security (6.2%) and Medicare (1.45%). Both employees and employers pay FICA, totaling 15.3% on wages.
Above-the-Line Deduction
Deductions subtracted from gross income to arrive at AGI, available regardless of whether you itemize. Examples include IRA contributions, student loan interest, and HSA contributions.