If you are employed, your boss probably pays many of your taxes for you. Your pay stubs will show withholding for federal income tax, Medicare, and FICA. At the end of the year, you will receive a W-2 showing your total earnings from your job and the total amount of taxes withheld. Self-employed people must also pay these taxes, and they have to handle all of the details themselves. To understand whether you have to pay the self-employment tax, you need to determine whether you are “self-employed” for federal tax purposes, and whether you make enough from self-employment to need to pay the tax. Our Los Angeles tax advisors can help you assess these factors.
What Is the Self-Employment Tax?
It might be easiest to define the self-employment tax by comparing it to the taxes paid by employed persons. A typical employee has two types of tax withheld from their paychecks. The first is their individual federal income tax withholding. The amount that their employer withholds from each paycheck is based on the information they provided on Form W-4.
The other type of tax, commonly known as “payroll tax,” goes towards Social Security and Medicare. The Social Security portion is often known as the FICA tax, after the Federal Insurance Contributions Act. The employer withholds the following percentages of the employee’s gross wages:
– 6.2% for Social Security; and
– 1.45% for Medicare
The employer must match these amounts. While the employee pays 7.65 percent of their paycheck, the total amount received by the government equals 15.3 percent.