Schedule C and self-employment tax
Schedule C (Form 1040) reports the profit or loss of a sole proprietorship, and Schedule SE turns that profit into self-employment (SE) tax. The decision rule: net profit goes to the 1040 as income, 92.35% of it is the base for SE tax at 15.3% up to the Social Security wage base, and half of the SE tax comes back as an adjustment to income. This guide uses tax year 2025 and the IRS sources Publication 334 (2025), the Instructions for Schedule C and the Instructions for Schedule SE. It is exam preparation, not tax advice.
The path of one dollar through the return
Follow a dollar of self-employment income in order:
- Schedule C, Part I and II. Gross receipts and other income, minus the expenses of the business, give net profit or loss (line 31). Part III covers cost of goods sold, Part IV vehicle information and Part V other expenses. A separate Schedule C is used for each sole proprietorship.
- Schedule SE. Pub 334 says SE tax and Schedule SE are required when net earnings from self-employment are $400 or more. Net earnings under the regular method are the profit multiplied by 92.35%.
- Form 1040. The profit is income. The SE tax is an additional tax, and one half of it is deducted on Schedule 1, line 15, as an adjustment to income. It is not an itemized deduction.
- QBI deduction. Schedule C income may be qualified business income, which can earn a deduction claimed on Form 1040 using Form 8995 or 8995-A (Pub 334).
The SE tax rate for 2025 is 15.3%, made up of 12.4% Social Security and 2.9% Medicare. Only the first $176,100 of combined wages, tips and net earnings is subject to the 12.4% part; the 2.9% part has no cap. A further 0.9% Additional Medicare Tax applies when SE earnings exceed $200,000 for single filers (head of household and qualifying surviving spouse too), $250,000 for married filing jointly or $125,000 for married filing separately; the threshold is reduced by any wages (Instructions for Schedule SE).
A worked example for 2025
A freelance designer (no employer wages) has these figures:
| Item | Amount |
|---|---|
| Gross receipts | $85,000 |
| Software and subscriptions | $3,000 |
| Business miles: 6,000 at the 2025 standard rate of 70 cents | $4,200 |
| Client meals: $1,000 spent, 50% deductible | $500 |
| Home office, simplified method: 200 sq ft at $5 | $1,000 |
| Other ordinary expenses | $16,300 |
| Net profit (Schedule C line 31) | $60,000 |
SE tax, step by step:
- Net earnings: $60,000 x 0.9235 = $55,410.
- Social Security: $55,410 x 12.4% = $6,870.84 (below the $176,100 wage base).
- Medicare: $55,410 x 2.9% = $1,606.89.
- SE tax: $8,477.73. Deduction for half: $4,238.87.
The $60,000 stays in income on the 1040, and the $4,238.87 reduces adjusted gross income. If the same designer also had $150,000 of W-2 wages, only $26,100 of room is left under the wage base, so the Social Security part would be $26,100 x 12.4% = $3,236.40 and total SE tax $4,843.29. Pub 334 puts it this way: the wage base applies to the combined total of wages, tips and net earnings.
Rules that need a rule, not just a receipt
- Meals are generally 50% deductible when ordinary, necessary, not lavish and the owner or an employee is present (Schedule C instructions).
- Vehicles: the 2025 standard mileage rate is 70 cents a mile; the alternative is actual expenses with depreciation, which is where depreciation and MACRS and Form 4562 enter. Form 4562 is attached only for depreciation on property placed in service in 2025, listed property or a section 179 deduction.
- Home office uses Form 8829 or the simplified method: $5 per square foot of the area used regularly and exclusively, limited to 300 square feet (Pub 334).
- Losses: a loss on line 31 may be limited by the at-risk and passive loss rules (Form 8582) and by the excess business loss limitation (Form 461). Activities not carried on to make a profit face a limit on deductions and generally cannot produce a loss against other income (Pub 334).
- Information returns: a Form 1099-K may not equal the income to report, because it can include sales tax or omit receipts (Pub 334).
Which exams test this
| Exam | How the topic appears | Covered on this site |
|---|---|---|
| SEE Part 1 | Domain 2, Income and Assets (17 scored questions): self-employment tax and self-employed health insurance as adjustments to income, plus 1099-NEC and 1099-K reporting. Domain 4, Taxation (15): self-employment tax again, and Additional Medicare Tax | Taxation explained covers SE tax; income and assets covers the adjustments |
| SEE Part 2 | Domain 1, Business Entities (30): sole proprietorships, qualified joint ventures, hobby versus business and partner self-employment income. Domain 2, Business Tax Preparation (37): vehicles, meals, home office and business expenses that fill Schedule C | Business entities and business tax preparation |
The SEE outlines are in the IRS candidate bulletin for the July 1, 2026 to February 28, 2027 window, which tests tax year 2025. Line-by-line walkthroughs are in SEE Part 1: from Schedule C to Form 1040 and SEE Part 2: Schedule C for a sole proprietor.
How exam questions are built
The traps are almost always one step skipped:
- 92.35%. Distractors apply 15.3% to the full profit.
- Which deduction. Half of SE tax is an adjustment to income, not a Schedule A item and not a Schedule C expense.
- Wage base with wages. A taxpayer with a W-2 job already near the base owes only the 2.9% on SE earnings.
- 50% of meals and the entity switch: the owner of a single-member LLC, a disregarded entity, reports on Schedule C (business entity types compared covers the classification). Spouses who are the only owners, both materially participate and file jointly can elect qualified joint venture treatment and each file a Schedule C; the Schedule C instructions say a business the spouses run through an LLC does not qualify.
- Year words. Mileage rates and the wage base change every year; the question states the year, so use that year’s figure.
For the filing side, a preparer also needs the right filing status before any of these numbers matter.
Practice questions
Question 1. For 2025, a sole proprietor with no wage income reports net profit of $40,000 on Schedule C. What is the self-employment tax, rounded to the nearest dollar?
- A. $6,120
- B. $5,652
- C. $2,826
- D. $1,071
Show answer
Answer: B
Net earnings are $40,000 x 0.9235 = $36,940. At 15.3% the SE tax is $5,651.82, about $5,652. Option A applies 15.3% to the full $40,000 and ignores the 92.35% step. Option C is the deduction for half of the SE tax ($2,826). Option D is only the Medicare part of the tax on net earnings.
Question 2. In 2025 a taxpayer earns $176,100 in W-2 wages and also has $50,000 of net profit on Schedule C. Which statement about self-employment tax is correct?
- A. The full 15.3% applies to 92.35% of the profit
- B. No SE tax is owed because wages reached the base
- C. Only the 2.9% Medicare part applies to the net earnings
- D. SE tax is owed only if the profit exceeds the wage base
Show answer
Answer: C
Wages already reach the $176,100 Social Security wage base, so the 12.4% part does not apply to the Schedule C profit. The 2.9% Medicare part applies to all net earnings, here $50,000 x 0.9235. Option A ignores the wage base, option B wrongly exempts the Medicare part, and option D confuses SE tax with the $400 filing threshold.