Selfemployed individuals must pay self-employment tax from "summary" of Income Tax Fundamentals 2021 by Gerald E. Whittenburg,Martha Altus-Buller,Steven Gill
Self-employed individuals are required to pay self-employment tax, which is comprised of Social Security and Medicare taxes. These taxes are similar to the Social Security and Medicare taxes that are withheld from the pay of most employees. However, self-employed individuals must pay both the employer's and the employee's share of these taxes, resulting in a higher overall tax burden. The self-employment tax rate is 15.3% of net earnings, consisting of 12.4% for Social Security and 2.9% for Medicare. The Social Security portion applies to earnings up to a certain threshold, which is adjusted annually for inflation. For earnings above this threshold, only the Medicare portion applies. In addition to the 15.3% tax rate, self-employed individuals may also be subject to an additional Medicare tax of 0.9% on earnings above a certain threshold. To calculate self-employment tax, individuals must first determine their net earnings from self-employment. This amount is calculated by subtracting business expenses from gross income. Once net earnings are determined, the self-employment tax is calculated as a percentage of this amount. Self-employed individuals are required to report and pay self-employment tax annually when they file their tax return. It is important for self-employed individuals to be aware of their self-employment tax obligations and to set aside funds throughout the year to cover these taxes. Failure to pay self-employment tax can result in penalties and interest being assessed by the IRS. By understanding and fulfilling their self-employment tax responsibilities, individuals can avoid potential issues with the IRS and ensure compliance with tax laws.
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