What is a Self-Employment Tax?

The self-employment tax refers to the Social Security and Medicare taxes paid on income earned by people who work for themselves.

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.

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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.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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