Why Schedule C businesses must pay self-employment tax

Quick answer: Self-employment (SE) tax applies to Schedule C businesses because sole proprietors and independent contractors don't have an employer withholding Social Security and Medicare taxes from a paycheck — so the SE tax exists to collect those same taxes directly from the business owner's net earnings.

Explanation

When you're self-employed, there's no employer splitting Social Security and Medicare taxes with you. Instead, IRS Publication 583 explains that self-employment tax is a social security and Medicare tax primarily for individuals who work for themselves, and your payments of SE tax contribute to your coverage under the social security system, providing retirement, disability, survivor, and hospital insurance (Medicare) benefits.¹

For anyone using Schedule C (a sole proprietor or independent contractor), Publication 334 confirms that if you are self-employed as a sole proprietor or independent contractor, you generally use Schedule C (Form 1040) to figure your earnings subject to SE tax.² Whether you actually owe the tax depends on the amount involved: generally, you must pay SE tax and file Schedule SE (Form 1040) if your net earnings from self-employment were $400 or more, and you use Schedule SE (Form 1040) to figure net earnings from self-employment.³

How the tax is calculated (2025):

• The 2025 SE tax rate on net earnings is 15.3% (12.4% social security tax plus 2.9% Medicare tax).⁴
• Only the first $176,100 of your combined wages, tips, and net earnings in 2025 is subject to any combination of the 12.4% social security part of SE tax, social security tax, or the Tier 1 part of railroad retirement tax.⁵
• All of your combined wages, tips, and net earnings are subject to any combination of the 2.9% Medicare part of SE tax, Medicare tax, or the Medicare part of railroad retirement tax⁶ — no cap on the Medicare portion.
• There's also a possible add-on: a 0.9% Additional Medicare Tax may apply to you if your net earnings from self-employment exceed a threshold amount (based on your filing status).⁷

Why this matters beyond just paying more tax: The documents note a practical reason to report accurately — be sure to report all of your self-employment income, because by not reporting all of it, you could cause your social security benefits to be lower when you retire.⁸

What it depends on:

• Whether your net earnings from self-employment reach the $400 threshold
• Your total combined wages plus self-employment earnings (affects the Social Security portion cap)
• Your filing status (affects the Additional Medicare Tax threshold)

This is a general overview for tax year 2025; if you have wages from an employer and self-employment income, or earnings near these thresholds, a CPA can help make sure your Schedule SE calculation and estimated tax payments are set up correctly.