Self Employment Taxes
| Author | Jeffrey Wilson |
| Pages | 1317-1319 |
Page 1317
Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. Social Security benefits are available to self-employed persons just as they are to wage earners. Most people who pay into Social Security work for someone else. Their employer deducts Social Security taxes from their paycheck, matches that contribution, and sends wage reports and taxes to the Internal Revenue Service (IRS) and Social Security. But self-employed people must report their earnings and pay the taxes directly to the IRS.
The main source of Social Security income is the taxes that employees, employers, and the self-employed pay. This is the primary method of financing Social Security. Both benefit amounts and Social Security taxes are based on the worker's earnings under the program.
The Social Security program is a system of social insurance under which workers (and their employers) contribute a part of their earnings in order to provide protection for themselves and their families if certain events occur. Since each worker pays Social Security taxes, each worker earns the right to receive Social Security benefits without regard to need. The fact that Social Security benefits go to some people who have high incomes has been a source of criticism. However, these persons pay into the program and play an important role in its financial base. Moreover, benefits of higher earners are subject to the income tax as a result of the 1983 Social Security amendments. Social Security taxes and benefit amounts are related to a person's level of earnings during working years. As people earn more money and pay more in Social Security taxes, they are earning a right to higher benefits. There is, however, a limit on the amount of yearly earnings on which Social Security taxes must be paid and on which program benefit payments are figured.
According to the IRS, an individual is selfemployed if that person operates a trade, business, or profession, either alone or with partners. Yearly
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earnings in excess of $400 must be reported on Schedule SE for Social Security purposes.
A trade or business is generally an activity carried on for a livelihood or in good faith to make a profit. The facts and circumstances of each case determine whether an activity is a trade or business. The regularity of activities and transactions and the production of income are important elements; however, making a profit is not essential to being in a trade or business as long as the business has a profit motive. The business does not have to be...
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