How Self-Employment Tax Is Calculated
Self-employment tax covers both the "employee" and "employer" portions of Social Security and Medicare taxes, since self-employed individuals don't have an employer to split the cost with:
Taxable SE Income = Net Earnings × 92.35%
Social Security Portion = min(Taxable SE Income, Wage Base) × 12.4%
Medicare Portion = Taxable SE Income × 2.9%
Why 92.35%?
The IRS allows you to reduce your net earnings by 7.65% before calculating SE tax, as a rough equivalent to how an employer's share of FICA wouldn't itself be subject to further FICA tax — this results in the 92.35% multiplier (100% − 7.65%).
Why Social Security Has a Wage Base Cap
The 12.4% Social Security portion only applies up to an annual wage base limit (adjusted yearly) — earnings above this threshold aren't subject to additional Social Security tax, though the 2.9% Medicare portion applies to all self-employment earnings with no cap.
The Deductible Half
You can deduct half of your self-employment tax as an adjustment to income on your federal tax return, which helps offset the fact that self-employed individuals pay both halves of FICA that would otherwise be split with an employer.