Self-Employment Tax

Self-employment tax is a tax that covers Social Security and Medicare contributions for individuals who work for themselves. Unlike traditional employees, who split these taxes with their employer, self-employed individuals must pay both the employer and employee portions, resulting in a combined rate of 15.3% (12.4% for Social Security and 2.9% for Medicare).

The tax applies to net self-employment income of $400 or more per year. An additional 0.9% Medicare surtax applies to self-employment income exceeding $200,000 for single filers or $250,000 for married couples filing jointly. Self-employed individuals can deduct the employer-equivalent portion (7.65%) of their self-employment tax when calculating their adjusted gross income.

For E-2 visa holders and international entrepreneurs operating businesses in the U.S., self-employment tax is an important consideration when choosing a business structure. Sole proprietors and general partners are subject to self-employment tax on all business income. Forming an S-Corporation can help reduce self-employment tax liability, as only the salary portion is subject to FICA taxes while distributions may be exempt.