Self employment tax is the way an independent contractor pays Medicare payroll and Social Security taxes. In the part of employees, the employee and employer divide the cost of the said payroll taxes, wherein each of them will pay 7.65% of the eligible wages. On the other hand, in the case of an independent contractor, he or she is the employer and employee at the same time, therefore, a self-employed individual will pay both of the halves, or 15.3% overall.
But who really pays a self-employment tax?
Individuals who own an entity may be mandated to pay these taxes in the amount combined which was 15.3% of their total earnings. A sole proprietor is the one who will pay the self employment tax on both the loss and income of his sole proprietorship.
A general partner in a partnership will also pay self-employment tax on the payments that he will receive from the said partnership and his share with the loss and income of the said partnership. Meanwhile, a limited partner will only pay self-employment tax on the guaranteed payments that he will receive from the said partnership as a compensation for all the services that he rendered to the partnership.
On the other hand, the member of Limited Liability Company which is treated like an S corporation or partnership will be paying this self-employment tax depending on the guaranteed payments that he will receive from the LLC and also of his distributive share of the income and loss of the LLC in case he participates in its management. Meanwhile, those who do not participate in the LLC’s management will just pay the tax on the payments that he will receive as a compensation for what he has done for the LLC. All of these individuals are entitled to pay the self-employment tax.