One common tax myth is the belief that only self-employed people pay self-employment tax. This misconception can lead to misunderstandings about tax liabilities and potential issues with the IRS. Here's what you need to know to stay compliant and avoid these pitfalls.

Origin of the Myth

• Focus on Self-Employment: The name "self-employment tax" leads many to believe it applies exclusively to self-employed individuals.

• Lack of Awareness: There is often a lack of understanding about other situations where similar taxes may apply.

Reality of Self-Employment Tax

• Self-Employed Individuals: Self-employment tax applies to net earnings from self-employment, including sole proprietors, independent contractors, and partners in a partnership.

• Additional Situations:

• Church Employee Income: Certain church employees who are exempt from Social Security and Medicare withholding may be subject to self-employment tax.

• Part-Time Business Owners: Employees with side businesses must pay self-employment tax on their net earnings from the business.

• Rental and Investment Income: In some cases, if rental or investment activities are considered a business, they may be subject to self-employment tax.

IRS Guidelines on Self-Employment Tax

• Self-Employment Tax Rate: The self-employment tax rate is 15.3%, which covers both Social Security (12.4%) and Medicare (2.9%) taxes.

• Form 1040 Schedule SE: Self-employment tax is calculated using Schedule SE (Self-Employment Tax) and reported on Form 1040.

Additional Medicare Tax

• High-Income Earners: Employees and self-employed individuals with high income may be subject to an Additional Medicare Tax of 0.9% on wages, compensation, and self-employment income above certain thresholds.

Why the Myth Persists

• General Misconceptions: Many taxpayers believe that only self-employment income is subject to additional taxes.

• Anecdotal Advice: Misleading information and anecdotal advice from non-professional sources perpetuate the myth.

Avoiding the Pitfall

• Understand Tax Obligations: Clearly understand the rules for self-employment tax and additional taxes that may apply.

• Self-Employment Tax: Applies to net earnings from self-employment.

• Additional Medicare Tax: Applies to high-income earners above certain thresholds.

What You Need to Do

• File Schedule SE: If you have self-employment income, calculate and report self-employment tax using Schedule SE.

• Report Additional Income: Ensure all income subject to self-employment tax or the Additional Medicare Tax is accurately reported on your tax return.

Consulting a Tax Professional

• Seek Professional Advice: Consulting a tax professional can ensure you understand your tax obligations and accurately report your income.

• Accurate Records: A professional can help you maintain proper documentation and navigate the complexities of self-employment and additional taxes.