Sole Proprietor Profit: Income Tax, Self-Employment Tax, or Both?
Business profit can feed both regular income tax and self-employment tax, but the calculations are not identical.
Income tax
Net business income generally flows into the taxpayer's broader individual income-tax calculation after applicable adjustments and deductions.
Self-employment tax
A separate calculation applies Social Security and Medicare tax concepts to qualifying net earnings from self-employment.
Deduction interaction
A portion of self-employment tax can create an adjustment in the individual income-tax calculation under current law.
Current limits
Wage bases, additional Medicare rules, and exact percentages can change, so use current-year materials for amounts.
The takeaway
Schedule C net business income generally affects taxable income and can also form the starting point for self-employment tax under current rules.
Related Summit guides
FAQ
Can sole-proprietor profit be subject to both taxes?
Yes.
Is self-employment tax identical to regular income tax?
No.
Should current wage bases and rates be checked annually?
Yes.