Self-Employment Tax

AAA

DEFINITION of 'Self-Employment Tax'

Money that a small business owner must pay to the federal government to fund Medicare and Social Security. Self-employment tax is due when an individual has net earnings of $400 or more in self-employment income over the course of the tax year. In any business, both the company and the employee are taxed to pay for these two major social welfare programs. When an individual is self-employed, she is both the company and the employee, so she pays both shares of this tax. Self-employment tax is computed and reported on IRS Form 1040, Schedule SE.

INVESTOPEDIA EXPLAINS 'Self-Employment Tax'

Individuals typically pay self-employment tax on 92.35% of their net earnings, not 100%. Self-employment tax is also a tax-deductible expense. Still, it represents a significant cost of being self-employed. The Social Security component of the self-employment tax phases out once net income reaches the low six figures, but all net income is subject to the Medicare tax. Self-employed individuals must pay self-employment tax as a condition of receiving Social Security benefits upon retirement.



RELATED TERMS
  1. Social Security Tax

    The tax levied on both employers and employees used to fund the ...
  2. Self-Employed Person

    An independent contractor or sole proprietor who reports income ...
  3. Corporate Tax

    A levy placed on the profit of a firm, with different rates used ...
  4. Income Tax

    A tax that governments impose on financial income generated by ...
  5. Indirect Tax

    A tax that increases the price of a good so that consumers are ...
  6. Local Tax

    A tax assessed and levied by a local authority such as a county ...
Related Articles
  1. Top 4 Financial Jobs You Can Do From ...
    Entrepreneurship

    Top 4 Financial Jobs You Can Do From ...

  2. Should You Incorporate Your Business?
    Entrepreneurship

    Should You Incorporate Your Business?

  3. 10 Tax Benefits For The Self-Employed ...
    Entrepreneurship

    10 Tax Benefits For The Self-Employed ...

  4. Self Employed? 5 Steps To Scoring A ...
    Options & Futures

    Self Employed? 5 Steps To Scoring A ...

comments powered by Disqus
Hot Definitions
  1. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will ...
  2. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following: ...
  3. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  4. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious ...
  5. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
  6. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by ...
Trading Center