Question

What taxes would an individual pay if he were self-employed and the business is not incorporated?

a) Corporate tax
b) Payroll tax
c) Income tax
d) Social security tax

Answer 1

Option C: A self-employed individual whose business is not incorporated would pay income tax and self-employment tax, which includes both the employer and employee portions of Social Security and Medicare taxes.

Step-by-step explanation:

If an individual is self-employed and their business is not incorporated, the individual will primarily pay income tax and self-employment tax. The self-employment tax consists of Social Security and Medicare taxes that typically get split between employer and employee. Since the self-employed person is both, they are responsible for the entirety of these taxes, which equates to 12.4% for Social Security on income up to a certain threshold (subject to change with tax laws) and 2.9% for Medicare with no income cap. It's also important to note that self-employment tax has a deductible portion when calculating income tax.

Additionally, the Social Security tax is considered regressive, because it is capped at a certain income level (for example, $113,000), and income above this level is not taxed. This affects lower-income earners disproportionately, as they pay the tax on a larger percentage of their total income compared to higher-income earners.