When you work as an employee, certain taxes are deducted monthly from your payroll by your employer. These federal taxes help fund Social Security and Medicare programs. Considering this, you might wonder whether people who are self-employed are also subject to contribute to these programs. The answer is yes, and they do so by paying the self-employment tax. Here’s what you need to know:
What Is Self-Employment Tax?
It is the federal tax paid by self-employed individuals. Like payroll taxes, self-employment taxes are used to fund Social Security and Medicare. When you are self-employed, the tax rate is 15.3%, with 12.4% going to Social Security and the remaining 2.9% to Medicare.
Working for a company allows you to pay fewer taxes as the total rate is split between you and your employer. But, since self-employment taxes are only shouldered you, these tend to be higher.
Who Is Required To Pay?
Self-employment tax must be paid by those who are freelancers, independent contractors, or small business owners who make gross earnings of $400 or more every year. But aside from this, other less common situations will require you to pay this type of federal tax.
For instance, if you are a U.S. citizen employed by a foreign government, you must pay self-employment tax. Also included are church employees who make $108.28 or more a year. If you are unsure whether you need to pay these taxes, it's best to refer to the Internal Revenue Service (IRS) website or talk to an expert.
Why Does Self-Employment Tax Matter?
Aside from having tax liability when you work in the American economy, paying your taxes allows you to contribute to Social Security and Medicare funds. These insurance programs help provide various benefits to qualified individuals. While you can get retirement, disability, and survivor benefits from Social Security, Medicare helps pay for health care and other medical expenses once you reach the age of 65.
Contact Lamkin Wealth Management Today
Knowing how to manage your taxes if you're self-employed is crucial. Talk to a professional to ensure you're doing the proper steps or paying the right taxes. Schedule an appointment with a financial advisor at Lamkin Wealth Management in Louisville, KY today. Our team, formed by Mark Lamkin, will be glad to assist you with your financial needs.