Self-employment tax is the Federal Insurance Contributions Act (FICA) tax that a person who is self-employed must pay on profits. The taxes consist of the Social Security taxes and Medicare taxes which are separate and operate differently. As of 2021, the Social Security taxes are 12.4% of the person’s profits up to a certain amount each year which currently stands at $142,800. Medicare taxes are 2.9% on all profits, but if a person’s wages exceed $200,000, an extra .9% Medicare tax applies. Self-employed people must pay both the individual and employer parts of FICA taxes unlike with usual wage earners, but they can deduct the employer portions as business expenses. For a tool to calculate FICA taxes, click here.
[Last updated in August of 2021 by the Wex Definitions Team]