AD Banker Comprehensive Practice Exam

Self-employed individuals have to pay which share of Social Security taxes?

1. Only the employee's share

2. Only the employer's share

3. Both the employer's and employee's shares

4. Neither share since they are self-employed

The correct answer is: Both the employer's and employee's shares

Self-employed individuals are required to pay both the employer's and employee's shares of Social Security taxes because they are essentially considered both the employer and the employee in their business activities. This means they have the obligation to cover the full amount of Social Security taxes that would normally be split between an employer and an employee in traditional employment situations. In the context of Social Security, the tax is typically divided into two parts: one part is paid by the employer and the other by the employee. However, when someone is self-employed, they pay the entire amount, which is measured through the Self-Employment Contributions Act (SECA). This system ensures that self-employed individuals contribute a fair share to the Social Security system, securing their eligibility for future benefits just like traditionally employed individuals. The correct understanding of this obligation reflects the nature of self-employment, where individuals take on both roles. As a result, they are liable for the full burden of these taxes, representing both shares traditionally paid by employer and employee combined into a unified payment obligation for self-employed individuals.