Self-employment tax

The self-employment tax is a federal tax paid by small business owners, which is used to fund the social security and Medicare programs. A self-employed person pays double the amount normally paid by an employee of a firm, since the self-employed person is paying both the employee share of the tax and the employer's matching amount. The social security component of this tax is capped at an inflation adjusted amount each year, but the Medicare portion of the tax has no cap, so it must be paid throughout the year. The self-employment tax is calculated on the Form 1040. This is likely to be one of the most significant expenses incurred by a self-employed person.