Self Employment Tax Flashcards, test questions and answers

Discover flashcards, test exam answers, and assignments to help you learn more about Self Employment Tax and other subjects. Don’t miss the chance to use them for more effective college education. Use our database of questions and answers on Self Employment Tax and get quick solutions for your test.

What is Self Employment Tax?

Self Employment Tax is a tax imposed on self-employed individuals to cover their portion of Social Security and Medicare taxes. Self employed individuals are required to pay this tax in addition to any other taxes they owe. The rate of the Self Employment Tax is based on the income earned from self-employment and can range from 15.3% up to 20%. For those who are self employed, it is important to understand how this tax works and what deductions may be taken against it. The income derived from self-employment must first be determined before any deductions can be taken against the amount owed in Self Employment Tax. This includes deductions for business expenses such as supplies, mileage, office rent and insurance premiums, as well as items such as health insurance premiums or contributions to retirement accounts. Once all eligible deductions have been subtracted from total income derived from self-employment, the remaining amount will be subject to the Self Employment Tax rate for that year. In addition, certain types of businesses may qualify for reduced rates or exemptions when it comes to paying Self Employment Tax. For example, farmers who meet certain qualifications may be eligible for a 50% reduction in their Self Employment Tax rate if they use cash accounting methods instead of accrual accounting methods when preparing their records for filing taxes. Members of some Native American tribes also may not have to pay any Social Security or Medicare taxes at all if they meet certain requirements set forth by the IRS or through tribal laws or regulations. Finally, there are ways that those who earn money through self-employment can reduce their liability with regard to paying Self Employed Taxes each year depending on their individual circumstances. By carefully considering how much money earned should be classified as wages versus profits when filing taxes each year, individuals may find that they owe less than anticipated in terms of their overall liability due on April 15th each year.