Who Needs to Pay the Self Employment Tax?

Written by Christi Hayes and Fact Checked by The Law Dictionary Staff  

For self-employed people, tax season can bring plenty of headaches and confusion. While taxes are usually not welcomed by most people, filing federal taxes presents very special challenges for those who are self-employed. These challenges arise because whereas most people have their payroll taxes deducted with each pay check by their employers, self-employed people enjoy no such benefit. As both employers and employees, self-employed individuals are responsible for paying these payroll taxes, such as Social Security and Medicare taxes, on their own. However, what can really confuse people is that being considered self-employed for tax purposes is not always obvious and there are cases where people who are employees of another person could nonetheless be considered self-employed. Here's a look at a few instances of where people may be classified as self-employed.

Freelancers

With the internet, freelance work has become easier than ever. From writers to photographers to web developers, there are plenty of ways whereby people earn part or all of their income through freelancing. Freelancers are considered self-employed in almost every situation.

Business owners

Business owners are also usually (but not always) considered self-employed people. Anybody who runs a home-based business will almost always be considered self-employed for tax purposes. For those who own and operate other types of businesses, however, the situation can get a bit more complex. Generally speaking, if payroll taxes have not been deducted from one's pay check then one is considered to be self-employed.

Independent contractors

This is a category that really tends to trip people up when it comes to paying self-employment taxes. The reason for the confusion is that many independent contractors are, in effect, working for another person or company. Therefore, a lot of independent contractors would not actually think of themselves as being self-employed, but, in the eyes of the IRS, they are! Independent contractors should be able to find out from the person or company they are working for whether or not they are being paid as independent contractors. Independent contracting jobs are especially common in construction, landscaping, sales, marketing, teaching, and services.

Taxes can be especially shocking for self-employed people since such people are usually required to hand over a substantial amount of money during each tax season. Because taxes are so complicated for self-employed people, it is important for everybody to understand that 'self-employed' as a tax term covers a wide array of jobs, many of which may not traditionally be considered self-employment.

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