Self-employment (SE) tax is Social Security and Medicare taxes collected primarily from individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners except a self-employed individual pays both the employee part and what would be the employer part.
Payments of SE tax contribute to the taxpayer’s coverage under the Social Security system. Social Security coverage provides the taxpayer with retirement, disability, survivor, and hospital insurance(Medicare) benefits.
Generally, taxpayers who are independent contractors or sole proprietors must file Schedule C and Schedule SE. Since taxes are not withheld from independent contractors’ pay, it is the taxpayer’s responsibility to pay income tax and SE tax on net earnings from self-employment income in the amount of $400 or more. The self-employment tax rate on net earnings is 15.3% (12.4% social security tax plus 2.9% Medicare tax).