Legal Definitions - Self-employment tax

Self-employment tax is a tax that people who work for themselves have to pay on their profits. It includes two parts: Social Security taxes and Medicare taxes. Social Security taxes are 12.4% of a person's profits up to a certain amount each year, which is currently $142,800. Medicare taxes are 2.9% on all profits, but if a person's wages exceed $200,000, an extra 0.9% Medicare tax applies. Unlike regular employees, self-employed people have to pay both the individual and employer parts of FICA taxes, but they can deduct the employer portions as business expenses.

For example, if someone runs a small business and makes a profit of $50,000 in a year, they would have to pay $6,200 in Social Security taxes and $1,450 in Medicare taxes. This means they would have to pay a total of $7,650 in self-employment tax.

Another example would be a freelance writer who earns $100,000 in a year. They would have to pay $12,400 in Social Security taxes and $2,900 in Medicare taxes. If they also had to pay an extra 0.9% Medicare tax, they would have to pay an additional $900. This means they would have to pay a total of $16,200 in self-employment tax.

These examples illustrate how self-employment tax works and how it can affect people who work for themselves. It's important for self-employed individuals to understand how much they owe in taxes and to budget accordingly.