How is the self-employment tax calculated?

The self-employment tax is calculated based on net earnings from self-employment at a rate of 15.3%. This rate comprises two components: 12.4% for Social Security and 2.9% for Medicare. It's important to focus on net earnings rather than gross income because self-employment tax is meant to reflect the actual income derived from self-employment activities after deducting allowable business expenses.

Net earnings from self-employment are calculated by taking the total income generated from self-employment and subtracting any business-related deductions. This ensures that the tax is applied to the actual income that the self-employed individual retains after covering their expenses, aligning the tax obligation with the true economic benefit received from their business.

Understanding this calculation is crucial for self-employed individuals or freelancers when planning their finances and ensuring compliance with tax obligations. Other percentages or bases mentioned in the incorrect options do not accurately represent how self-employment tax is computed, further underscoring the significance of knowing the correct rate and calculation method.