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.

BREAKING DOWN '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. Self Employed Contributions Act ...

    A form of taxes that self-employed business owners must pay based ...
  2. Freelancer

    A freelancer is an individual who earns money on a per-job or ...
  3. Medicare Wages

    An employee's earnings that are subject to a U.S. payroll tax ...
  4. Effective Tax Rate

    The average rate at which an individual or corporation is taxed. ...
  5. Income Tax

    A tax that governments impose on financial income generated by ...
  6. Simplified Employee Pension - SEP ...

    A retirement plan that an employer or self-employed individuals ...
Related Articles
  1. Retirement

    How Social Security works for the self-employed

    As both employee and employer, you have to pay more in Social Security, but there are deductions that can help lighten the tax burden. Find out how Social Security works for the self-employed. ...
  2. Retirement

    Retirement Planning for the Self-Employed

    The three retirement-savings options best suited to the entrepreneur.
  3. Personal Finance

    The Ultimate Tax-Time Checklist

    Find out what information you need to pull together before filling out your return.
  4. Retirement

    An Introduction To The Keogh Retirement Plan

    Learn more about this popular defined-contribution retirement plan that many business owners, proprietors, and self-employed people can benefit from.
  5. Retirement

    Will the Social Security Cap Increase Help It Last Longer?

    The Social Security cap increase will be 7% in 2017, but even that may not be enough to keep Social Security from running out of funds.
  6. Retirement

    Work in the Gig Economy? Don't Miss Out on Retirement Savings

    Here are 5 smart ways the self-employed can save for retirement. Don't miss out – and get financial advice before picking a strategy.
  7. Retirement

    When Do I Stop Paying Social Security Tax?

    Almost never, unless you belong to one of these special groups.
Hot Definitions
  1. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  2. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  3. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  4. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  5. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
  6. Price Elasticity of Demand

    Price elasticity of demand is a measure of the change in the quantity demanded or purchased of a product in relation to its ...
Trading Center