Definition of Self Employment Tax
Self-employment tax is a tax people who work for themselves have to pay. They must pay this tax because people who work for an employer have this tax deducted from their paychecks already, whereas a self-employed individual does not have the tax taken out. The self-employment tax covers social security and Medicare.
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Definition
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Self-employment tax is a tax levied by the Internal Revenue Service to make up for a self-employed person not paying their FICA and SECA taxes.
Rates
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The self-employment tax is a two-part tax. The first part of the tax is for social security. Social security is an insurance for old age, survivors and disabilities. The tax rate for social security is 12.4 percent. The second part of the tax is for Medicare. Medicare is a hospital insurance. The tax rate for Medicare is 2.9 percent.
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Maximum Earnings
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The Internal Revenue Service only taxes the first $106,800 of earnings in 2009 for the self-employment tax. This only applies for the social security tax. It does not apply for the Medicare part of the self-employment tax.
Self-Employment Tax Deduction
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The self-employment tax deduction is on Form 1040 Line 27. The taxpayer can deduct half of their self-employment tax from their income when computing adjusted gross income. This deduction does not change the amount of self-employment tax the taxpayer must pay.
Who is Self-Employed?
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The IRS considers a self-employed person to be: a sole proprietor, independent contractor, a partner in a partnership or in business for himself; even a part-time business qualifies as self-employment.
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References
- Photo Credit tax forms image by Chad McDermott from Fotolia.com
