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Simple English definitions for legal terms
Self-employment tax
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A quick definition of Self-employment tax:
Self-employment tax: When someone works for themselves, they have to pay a special tax called self-employment tax. This tax is made up of two parts: Social Security tax and Medicare tax. Social Security tax is 12.4% of the money they make, up to a certain amount each year. Medicare tax is 2.9% of all the money they make. If they make more than $200,000, they have to pay an extra 0.9% for Medicare tax. Self-employed people have to pay both parts of the tax, but they can take some of it off their taxes as a business expense.
If you want to know how much self-employment tax you have to pay, you can use a tool to calculate it.
A more thorough explanation:
Self-employment tax is a tax that people who work for themselves have to pay on their profits. It includes two parts: Social Security taxes and Medicare taxes. Social Security taxes are 12.4% of a person's profits up to a certain amount each year, which is currently $142,800. Medicare taxes are 2.9% on all profits, but if a person's wages exceed $200,000, an extra 0.9% Medicare tax applies. Unlike regular employees, self-employed people have to pay both the individual and employer parts of FICA taxes, but they can deduct the employer portions as business expenses.
For example, if someone runs a small business and makes a profit of $50,000 in a year, they would have to pay $6,200 in Social Security taxes and $1,450 in Medicare taxes. This means they would have to pay a total of $7,650 in self-employment tax.
Another example would be a freelance writer who earns $100,000 in a year. They would have to pay $12,400 in Social Security taxes and $2,900 in Medicare taxes. If they also had to pay an extra 0.9% Medicare tax, they would have to pay an additional $900. This means they would have to pay a total of $16,200 in self-employment tax.
These examples illustrate how self-employment tax works and how it can affect people who work for themselves. It's important for self-employed individuals to understand how much they owe in taxes and to budget accordingly.