Self-Employment Tax

What is the Self-Employment Tax?

Self-employment tax refers to taxes that self-employed people or small business owners must pay to the government in order to fund social security and Medicare. General conditions for such tax include having a net self-employment income of $400 or more over one tax year. Those who make less than this figure are generally exempt from paying self-employment tax.

How does the Self-Employment Tax work?

Self-employment tax is collected from self-employed individuals who do not otherwise pay withholding taxes. The IRS also considers members of a partnership who carry a trade or business as self-employed.

The self-employment tax rate is 15.3%. That rate is the sum of 12.4% for Social Security and 2.9% for Medicare. Self-employment tax applies to net earnings, also known as profit.

One big difference between the self-employment tax and the payroll taxes workers with regular jobs pay is that typically employees and their employers split the cost of Social Security and Medicare (employee and employer each pay 7.65%), whereas self-employed individuals pay both halves. Most individuals pay self-employment taxes throughout the year to spread the cost and not have to pay the full amount all at once. To pay self-employment tax, an individual must have a Social Security number (SSN) or an individual taxpayer identification number (ITIN). These numbers can be obtained through the IRS.

The self-employment tax rules apply to all individuals who are of legal age to work and even if they are already receiving Social Security or Medicare.

Conclusion

Processing an individual’s taxes correctly can be challenging without the latest information and the right experts who continue to monitor ever-changing regulations. Therefore, when it comes to deductions, it’s important to be well-versed in all forms of payroll deductions and to explain how they work. Working with professionals within the financial industry is recommended when dealing with tax and deduction-related issues.

For additional information, see terms entitled Deductions, Self-Employed Health Insurance Deduction.