Freelance Glossary > S > Self-employment Taxes

Self-employment Taxes

Self-employment taxes are taxes that are paid by individuals who are self-employed and who earn income from self-employment activities. In the United States, self-employment taxes are typically composed of two main components: Social Security tax and Medicare tax.

Social Security tax is a tax that funds the Social Security program, which provides retirement, disability, and survivor benefits to individuals and their families. At time of writing, the Social Security tax rate for self-employed individuals is 12.4% of net earnings up to a certain limit, which is adjusted annually.

Medicare tax is a tax that funds the Medicare program, which provides healthcare benefits to individuals who are 65 or older, as well as certain individuals with disabilities. At time of writing, the Medicare tax rate for self-employed individuals is 2.9% of net earnings, with no limit.

In addition to Social Security and Medicare taxes, self-employed individuals may also be required to pay state and local taxes on their self-employment income, depending on the jurisdiction in which they operate.

Self-employment taxes are typically paid quarterly and are reported on IRS Form 1040-ES for United States residents. Self-employed individuals may also be required to make estimated tax payments throughout the year to avoid penalties for underpayment of taxes.

See also: S-Corp Election, Spendable Income, S-Corp, Net Profit

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