Self-Employment Tax

The 15.3% combined Social Security (12.4%) and Medicare (2.9%) tax that sole props pay on net earnings, the same payroll tax a W-2 employer and employee split. You only get taxed on 92.35% of your net Schedule C profit (the IRS subtracts the deemed employer share before applying the 15.3%). That 92.35% number is also why Solo 401(k) employer profit sharing for sole props effectively works out to 20% of Schedule C profit, not the 25% you'd get on W-2 wages. S-Corp owners avoid SE tax on distributions but still pay payroll tax on their W-2 salary; the IRS demands "reasonable compensation" so this is not a free pass.