Tax Dictionary – Self-Employment Tax
Self-employment tax is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners.
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Self-employment tax (SE tax) is made up of Social Security and Medicare taxes. If you earn self-employment income, reported on Form 1099-MISC, you must pay a 15.3% self-employment tax. However, if you’re classified as an employee and earn wages reported on Form W-2, your employer pays half of your SE tax (7.65%). The remaining half is usually deducted from your paycheck.
You’re considered self-employed if you own your own business or the company you work for classifies you as an independent contractor. Because tax is usually not withheld from self-employment income (nonemployee compensation), you’re required to make estimated tax payments during the year to cover your federal income tax and SE tax.
Taxpayers sometimes don’t understand this rule, and end up with a notice from the IRS.
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