Self Employment Tax
What Is Self Employment Tax?
Self-employment tax is a tax paid by individuals who work for themselves to fund Social Security and Medicare programs.
Unlike traditional employees who split payroll taxes with their employer, self-employed individuals are responsible for paying the full amount themselves.
Why It Matters
Self-employment tax ensures that self-employed workers contribute to the same federal programs that employees support through payroll taxes.
Understanding this tax helps freelancers and business owners plan for tax obligations and avoid surprises at tax time.
How Self Employment Tax Works
Self-employed individuals calculate this tax based on net earnings from self-employment.
The tax typically includes:
- Social Security tax
- Medicare tax
Self-employed taxpayers often make estimated tax payments throughout the year to cover these obligations.
Example
If a freelance consultant earns $80,000 in net self-employment income, they must pay self-employment taxes in addition to any income taxes owed.
Self Employment Tax vs Payroll Tax
- Payroll tax is split between employers and employees.
- Self-employment tax requires the self-employed worker to pay both portions.
FAQs About Self Employment Tax
Who must pay self-employment tax?
Individuals earning income from freelance work or business activities.
Is self-employment tax separate from income tax?
Yes. Both taxes may apply to the same income.
How are self-employment taxes paid?
Many taxpayers make quarterly estimated payments to the IRS.
Related Terms
