Self-Employment Tax for LLC Owners

Self-employment tax is one of the biggest surprises for new LLC owners. Understanding how it works helps you plan and potentially reduce your tax burden.

What Is Self-Employment Tax?

Self-employment (SE) tax is Social Security and Medicare tax for self-employed individuals. When you work as an employee, your employer pays half of these taxes and withholds the other half from your paycheck.

As an LLC owner, you're self-employed. You pay both halves yourself.

SE tax covers:

• Social Security: Funds retirement and disability benefits
• Medicare: Funds health insurance for those 65+

How Much Is Self-Employment Tax?

The SE tax rate is 15.3% of net self-employment earnings:

• 12.4% for Social Security (on earnings up to $168,600 in 2024)
• 2.9% for Medicare (on all earnings)

Additional Medicare tax:

• 0.9% additional Medicare on earnings above $200,000 (single) or $250,000 (married filing jointly)

Example Calculation

If your LLC has $100,000 in net profit:

That's $14,130 just in SE tax, before income tax.

How to Calculate SE Tax

Here's the formula:

1. Calculate net self-employment income (revenue minus business expenses)
2. Multiply by 92.35% (this accounts for the employer-equivalent portion deduction)
3. Multiply by 15.3%

You report and pay SE tax using Schedule SE, attached to your Form 1040.

Strategies to Reduce Self-Employment Tax

S-Corporation Election

The most common strategy is electing S-corp taxation. Here's how it works:

1. Pay yourself a "reasonable salary" (subject to payroll taxes, equivalent to SE tax)
2. Take remaining profits as distributions (not subject to SE tax)

Example

When S-Corp Makes Sense

S-corp election typically makes sense when:

• Annual profit exceeds $50,000-70,000
• The SE tax savings exceed the additional costs (payroll processing, accounting)
• You can justify a reasonable salary that's less than your total profit

Other Deductions

While you can't avoid SE tax directly, maximizing business deductions reduces your net profit (and therefore SE tax):

• Health insurance premiums (self-employed deduction)
• Retirement contributions (SEP-IRA, Solo 401k)
• Home office deduction
• Business equipment and supplies
• Professional development and education

Frequently Asked Questions