What is a Self-Employment Tax?
How Does a Self-Employment Tax Work?
People who are self-employed must pay both the employee and employer portion of the Federal Insurance Contributions Act (FICA) tax (a total of 12.4% rather than the 6.2% normally paid by employees) and both halves of the Medicare tax (2.9% rather than 1.45% normally paid by employees). The self-employed can estimate these taxes using schedules C and SE of IRS Form 1040.
The self-employed usually pay self-employment taxes quarterly. The taxpayer's end-of-year tax return then determines if the payments were sufficient. The self-employed may still be required to pay self-employment tax even if they are receiving Social Security benefits.
Why Does a Self-Employment Tax Matter?
Employees and employers normally split Social Security and Medicare taxes, but the self-employed are responsible for paying both portions of the tax. This tends to decrease the net income derived from self-employment, although half of the self-employment tax is generally deductible against the taxpayer's total income reported on IRS Form 1040.
Payment of these taxes makes the self-employed eligible for Social Security and Medicare benefits.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
With more than a million new job listings every month, Craigslist is flush with opportunities in every industry. Seasonal retail jobs, research assistants, project managers, tanning salon...Read More →
One of the most interesting elements in the evolution of the ETF marketplace has...Read More →
Every year in January, I do a big portfolio review. I rebalance my portfolio and make sure that I still like my current mutual funds and ETFs. And I get to know the...Read More →