What is self-employment tax?

Self-employment tax specifically refers to the tax that self-employed individuals must pay, which is designed to cover their contributions to Social Security and Medicare. This tax serves to ensure that self-employed individuals, who do not have an employer to withhold these taxes from their earnings, contribute to the same Social Security and Medicare systems that traditionally employed individuals benefit from.

Self-employment tax is calculated based on the net earnings from self-employment, which is generally reported on Schedule C of the individual's tax return. The rate for self-employment tax is currently set at 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare. If self-employed individuals earn above a certain threshold, they may also be subject to an additional 0.9% Medicare tax.

In contrast, other choices do not accurately describe self-employment tax. It is not limited to high-income earners; rather, it applies to anyone who earns income from self-employment. Additionally, it is not a tax assessed only on corporations, as corporations have different tax obligations, and it is not related to penalties for late tax filings. This makes the definition of self-employment tax as a contribution to Social Security and Medicare for self-employed