The self-employment tax is an additional tax levied on self-employment income under the Self-Employment Contribution Act (SECA). The self-employment tax is comprised of a 12.4% Social Security tax and a 2.9% Medicare tax, for a combined 15.3% tax. The self-employment tax is in lieu of the tax on wages under the Federal Insurance Contributions Act (FICA), pursuant to which an employer is required to withhold Social Security and Medicare taxes from wages paid to the employee and to pay the employer’s own share of these taxes.
The Social Security tax is limited in application to the Social Security wage base for the year, which is $117,000 for 2014. The Social Security wage base is reduced by wages that are subject to FICA. So if a taxpayer has both wages and self-employment income for the tax year, the Social Security Wage base is reduced by the amount of wages subject to FICA.
There is no cap on the Medicare tax portion of the self-employment tax, and for self-employment income in excess of $200,000 ($250,000 for join filers and $125,000 for those married and filing separately), the Medicare tax rate is increased by 0.9% to 3.8%. The applicable threshold amount is reduced by a taxpayer’s wages if the taxpayer or his or her spouse have both self-employment income and wages.