For the 2025 U.S. federal tax year, a sole proprietor has $80,000 of net self-employment earnings. Which statement correctly describes the self-employment (SE) tax mechanics that apply?
- SE tax is imposed at a combined 15.3% rate (12.4% Social Security plus 2.9% Medicare), and the taxpayer may deduct one-half of the SE tax when computing AGI
- SE tax is imposed at 7.65%, matching only the employee share of FICA, with no additional deduction available
- SE tax is fully deductible as an itemized deduction on Schedule A
- SE tax replaces federal income tax on self-employment earnings, so no separate income tax is owed on that income
Correct answer: A. SE tax is imposed at a combined 15.3% rate (12.4% Social Security plus 2.9% Medicare), and the taxpayer may deduct one-half of the SE tax when computing AGI
The IRS sets the self-employment tax rate at a combined 15.3%, made up of 12.4% for Social Security and 2.9% for Medicare, and allows the self-employed taxpayer to deduct the employer-equivalent half of that tax as an adjustment to income when figuring AGI, mirroring the fact that an employer would otherwise pay half of an employee's FICA tax. The second option is wrong because 7.65% is only the employee-side FICA rate; self-employed individuals owe both the employee and employer shares, totaling 15.3%. The third option is wrong because the SE tax deduction is an above-the-line adjustment to income on Schedule 1, not an itemized deduction on Schedule A, so it is available even to taxpayers who take the standard deduction. The fourth option is wrong because SE tax funds Social Security and Medicare separately from, and in addition to, federal income tax owed on the same self-employment earnings.
Source: IRS 'Self-employment tax (Social Security and Medicare taxes)'; 2025 Instructions for Schedule SE (Form 1040)