Unbeknownst to many people, self-employment tax is a Federal tax that is imposed on net self-employment earnings. This is the case even when those earnings come from sources outside the United States.

The rate (normally 15.3%) is reduced by 2% for the 2011 calendar year. It consists of 10.4% Social Security (capped at a maximum of US $106,800 earnings) and 2.9% Medicare (uncapped). This is applied to a base of 92.35% of net self-employment income.

An above-the-line deduction of 50% of the tax is available in the same year as the tax is calculated.

The IRS definition of self-employment income is very loose. IRS pronouncements state that ‘if you are in business for yourself, you are self-employed’.

Interposing a corporate entity does not negate this.