Starting and running a business is hard. You bet on yourself, trade a steady paycheck for uncertainty, and pour your best hours into something you believe matters. Then you finally land on a decent profit and think, “Nice. I shouldn’t owe much tax. I’m small.”

Then you open your tax return and meet the real jump scare: self-employment tax.

Not an IRS agent at your door, just a line item that makes your stomach sick.

The #1 surprise for new business owners: Self-employment tax

If you have $400 or more of net earnings from self-employment, you’re generally in self-employment tax territory. This commonly includes:

• Schedule C sole proprietors

• Many single-member LLC owners (taxed as sole props)

• 1099 contractors/commission workers

• Many partners in partnerships

• Certain church employees with special rules

What self-employment tax actually is

Self-employment tax is basically the payroll taxes you used to “split” with an employer, but now you’re paying both halves.

• 15.3% total on net self-employment earnings (in general)

  • 12.4% Social Security (up to the annual wage base for the year)

  • 2.9% Medicare (with an additional Medicare tax at higher incomes)

And here’s the kicker: that’s on top of regular income tax. So even with “only” $50,000 of profit, your effective tax rate can feel a lot spicier than expected.

Why it feels unfair (and why it happens)

Back when you were a W-2 employee, you saw payroll taxes withheld… but your employer matched them behind the scenes. As a self-employed owner, you’re both employee and employer, so the government collects the full amount from you.

That’s the math. The surprise is the pain.

The common strategy: S-Corporation election

For some businesses, an S-Corp can reduce self-employment tax exposure by splitting your income into:

1. A reasonable salary (subject to payroll taxes), and

2. Remaining profit distributions (generally not subject to self-employment tax)

This can potentially save real money, but it adds admin:

• S-Corp tax return (Form 1120-S)

• Payroll setup and filings

• Clean bookkeeping and compliance

It’s not a magic checkbox, but it can be a powerful lever when the numbers justify it.

Bottom line: If you’re self-employed, the “tax surprise” usually isn’t income tax. It’s payroll tax wearing a different costume. And if your profits are consistently strong, it may be worth evaluating whether an S-Corp makes sense for your tax situation.