The self-employment tax rate is 15.3%, which is the sum of 12.4% for Social Security and 2.9% for Medicare. Net earnings from self-employment, after being multiplied by 0.9235, are multiplied by the 15.3% rate, if taxable net earnings are not more than $97,500. The reason for the 15.3% rate is that it comes close to matching the employee and employer portions of Social Security and Medicare taxes for a W-2 employee.
In some cases, retired persons decide to become self-employed and generate earnings from self-employment. These taxpayers would be liable for self-employment tax on their self-employment income even though they have retired and are receiving Social Security benefits.
There are also taxpayers with both self-employment income and wage or W-2 income which is subject to Social Security and Medicare taxes, also known as FICA taxes. The taxpayer’s self-employment tax liability can be affected by the amount of those FICA earnings. In the case of a taxpayer whose FICA wages or tips equal or exceed $97,500, that taxpayer’s net earnings from self-employment would only be subjected to the 2.9% rate.
For a statutory employee, like a full-time insurance salesperson, their wages would be subject to withholding for Social Security and Medicare taxes. Therefore, the statutory employees would not be liable for self-employment tax.
The Internal Revenue Service has specific rules relating to self-employment tax for some occupations or businesses. For example, a babysitter working out of their own home and controlling the performance of their own duties would be considered self-employed. However, if the babysitter carries out their duties according to someone else’s, such as the parents’, instructions, he or she is the employee of the parents, and not self-employed. Another specific rule relates to directors. If you are not an employee of the company, but are paid fees for attending meetings, those fees are considered self-employment income, and would be subject to self-employment tax.
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