The self-employment tax is a federal tax in the United States, payable to the IRS. It is a Social Security and Medicare tax, and is paid by business owners, freelancers, and independent contractors. When an employee in a company (what the IRS calls a “wage earner”) gets a paycheck, their taxes for Medicare and Social Security are automatically withheld. When you work for yourself, you need to pay that tax yourself, and it’s paid in the form of your self-employment tax. According to the IRS web site (www.irs.gov) the current self-employment tax rate (as of September 2005) is 15.3%, with 12.4% going to Social Security and 2.9% going to Medicare.

You owe self-employment tax if you make more than $400 from self-employment activities during the year, even if you only complete those activities part-time while holding a regular full-time job. The tax must be paid throughout the year, as you’re earning your income, just like employees who have to make contributions from each paycheck. You have to make estimated tax payments throughout the year if you expect to owe $1000 or more in taxes, by using schedule SE. You can’t just wait until you file for your tax return at the end of the year.

Categories: Management / Finance
Tags: