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I agree with Bill. The reason to reduce ones SE income by 7.65% is so the worker is not paying SE tax on SE tax. IOW, you take the SE tax out first and then calculate the SE tax on what remains of the earned income.

Interestingly, the employee's portion of the SE tax may not be 7.65%. If the SE income exceeds the maximum subject to the 12.4% SS tax ($128,400 for 2018), then the SE tax rate declines as the SE income increases above this level. But the Schedule SE does not adjust for this, at least that I can see. The entire SE income....even if it were $1MM, is multiplied by .9235 on line 4 of Schedule SE before then separating the SS tax from the Medicare tax for high incomes.

Another sort of interesting finding on this....the current 15.3% rate began in 1990. For 1989 and 1988 it was 13.02%. But the Schedule SE for these years did not first multiply the earned income by .9349 (1-(.1302/2)) before calculating the SE tax. Go figure.

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