If you own a growing, unincorporated small business, high self-employment (SE) tax bills might already be on your radar. The SE tax covers your contributions to Social Security and Medicare as a self-employed individual.
SE tax basics
The 15.3% SE tax rate applies to the first $168,600 of your 2024 net self-employment income. This rate includes 12.4% for Social Security and 2.9% for Medicare. In 2025, the rate will apply to the first $176,100 of your net income.
Beyond those thresholds, the 12.4% Social Security tax component of the SE tax drops off, but the 2.9% Medicare tax still applies to all income.
How high can your SE tax bill climb? Higher than you might think. The main driver is the 12.4% Social Security tax, because the Social Security tax ceiling increases every year.
To calculate your SE tax, start with your taxable self-employed income (usually from Schedule C of Form 1040) and multiply by 0.9235 to get your net SE income. For 2024, if your net SE income is $168,600 or less, multiply the amount by 15.3% to find your SE tax. If it’s more than $168,600, multiply $168,600 by 12.4% and the total by 2.9%, then add them together.
Example: If your net SE income for 2024 is $200,000, your SE tax bill will be $26,706 (12.4% × $168,600) + (2.9% × $200,000)., totaling $26,706. That’s a hefty tax bill!
Projected tax ceilings for 2026–2033
The current Social Security tax on your net SE income may seem steep, but it will likely get worse. As your business income grows, the Social Security tax ceiling will continue to rise with inflation.
Here are the latest projections from the Social Security Administration (SSA) for the tax ceilings from 2026–2033:
- 2026 - $181,800
- 2027 - $188,100
- 2028 - $195,900
- 2029 - $204,000
- 2030 - $213,600
- 2031 - $222,900
- 2032 - $232,500
- 2033 - $242,700
Could these projections be too low? Definitely. The SSA’s estimates often come in lower than the final numbers. For example, the 2025 ceiling was initially projected to be $174,900 but ended up at $176,100. But if the projected ceiling holds, by 2033, the SE tax on $242,700 of net SE income will be a whopping $37,133 (15.3% × $242,700).
Disconnect between tax ceiling and benefit increases
While it may seem logical that the Social Security tax ceiling would rise at the same rate as Social Security benefits, they don’t. For example, the 2024 Social Security tax ceiling is up 5.24% from 2023, but benefits for Social Security recipients increased by just 3.2%. Similarly, the 2025 Social Security tax ceiling will rise by 4.45%, but the benefits are only going up by 2.5%
This discrepancy is due to different inflation measures being used. The Social Security tax ceiling rises with average wage increases while benefits are adjusted based on general inflation.
S corporation strategy
While your SE tax bills are steep and likely to rise, there are ways to reduce them to more manageable levels. One strategy is to start running your business as an S corporation.
You could pay yourself a reasonable salary and distribute the remaining income as dividends. Only your salary would be subject to Social Security and Medicare taxes, potentially saving you money. Reach out to your Smolin advisor to explore strategies for managing your SE tax.