How does self-employment income affect Social Security taxes?

Self-employment income incurs a self-employment tax on net earnings, which is essential for Social Security taxes. When individuals earn income through self-employment, they are responsible for paying both the employee and the employer portions of Social Security and Medicare taxes. This means that instead of the usual 7.65% that employees pay through payroll withholding, self-employed individuals pay a total of 15.3% on their net earnings. This tax is comprised of 12.4% for Social Security and 2.9% for Medicare.

Calculating self-employment tax begins with assessing net earnings, which is typically the gross income from self-employment minus business expenses. Self-employment tax is based on this net income, ensuring that self-employed individuals contribute to Social Security, earning credits towards their future benefits in the same way as those who are employed by an organization and have taxes withheld from their paychecks. This system ensures that all working individuals, regardless of employment status, contribute to Social Security funding.