Income tax is paid by everyone. Self-employment tax covers your SECA tax (Self-Employment Contributions Act) for Medicare and Social Security.
When you are employed, the employer withholds and pays for Social Security and Medicare. When you are self-employed you need to pay this yourself.
The tax includes two parts.
- 12.4 percent for Social Security. For 2016, this part of the tax applies to the first $125,000 of earnings. If you earn more than that (from self-employment or, if you also have a job, from the combination of your job and your business), then the 12.4 percent part of the tax that pays for Social Security stops for the year.
- 2.9 percent for Medicare. The Medicare portion of the self-employment tax doesn’t stop. No matter how much you earn, you'll pay the 2.9 percent Medicare tax.