Self-Employment Tax
Federal Tax Course – Lesson 14

Self Employment Tax FICA FUTA:

A number of years ago Congress established the Social Security system to provide for:

1. Old age retirement and disability benefits for retired workers and their families under the Federal Insurance Contributions Act (FICA), and,
2. The administration of the Federal-State Unemployment Compensation Program under the Federal Unemployment Tax Act (FUTA).

The money necessary for these programs is raised through two separate taxes, called “FICA” and “FUTA” taxes. However, both the FICA tax and the FUTA tax are payroll taxes and thus apply only to individuals who receive salaries or wages as employees. Hence, individuals who are not employees were neither subject to the taxes nor were eligible to receive the benefits provided under the Act.

Congress, however, later felt that individuals who are in business for themselves or “self-employed” should also participate in the old-age and disability benefit program in order that they may be eligible for retirement and disability benefits. Accordingly, in 1951, Congress enacted the Self- Employment Act which provided for a separate self-employment tax on income from self-employment and which is paid into the general social security fund which finances the payment of retirement and disability benefits to self-employed individuals. When the “medicare” program was enacted in 1965, the self- employment tax was increased to include the hospital insurance (medicare) tax.

In other words, the self-employment tax consists of two components: (1) social security tax, and (2) medicare tax.

The self-employment tax is a separate tax and has no connection with the income tax. However, individuals subject to the self-employment tax must attach their self-employment tax schedule to the income tax return and pay the self-employment tax together with their income tax. For this reason the tax practitioner must be thoroughly familiar with the provisions of the self-employment tax.

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