Final answer:
Self-employment tax rate, which is a total of 15.3%, consists of both Social Security (12.4%) and Medicare (2.9%). A self-employed individual must pay both the employee and employer portions, unlike traditional employment where these taxes are split between the employee and employer.
Step-by-step explanation:
The self-employment tax includes both the employer and employee portions of the Social Security and Medicare taxes, amounting to a total rate of 15.3%. For Social Security, the rate is 12.4% on income up to a certain threshold (which is $142,800 for 2021, subject to annual adjustments), which includes 6.2% typically paid by an employee and 6.2% by the employer. Medicare tax is 2.9%, again split half by the employee and employer if you were traditionally employed. As a self-employed individual, you are responsible for the whole 15.3% since you are effectively both the employee and the employer.
If an individual is self-employed and the business is not incorporated, they would need to pay the 15.3% self-employment tax, which covers both Social Security and Medicare. Additionally, they would be responsible for federal and state income taxes. It's important to note that the social security part of self-employment tax has an income cap, after which no additional social security tax is levied, while Medicare taxes continue to be applied to all income levels. This structure makes the Social Security tax regressive, as it does not scale up with higher income levels beyond the cap.