Bart is contemplating starting his own business. His new business would operate as a sole proprietorship and would require hiring several employees. Describe the employment-related taxes that Bart should be aware of as he starts his new business as a self-employed business owner.
What will be an ideal response?
Employment taxes consist of the Old Age, Survivors, and Disability Insurance (OASDI) tax, commonly called Social Security tax, and the Medical Health Insurance (MHI) tax, known as the Medicare tax. The Social Security tax pays the monthly retirement, survivor, and disability benefits for qualifying individuals, whereas the Medicare tax pays for medical insurance for individuals who are elderly or disabled. The tax base for the Social Security and Medicare taxes is wages or salary, and the rates are 12.4 percent and 2.9 percent, respectively. Employers and employees split this tax equally. Thus, Bart will have to pay the employer's portion of these taxes for his employees.
As a self-employed individual, Bart must also pay the self-employment tax, which is basically the same as the employer's and employee's share of the Social Security and Medicare taxes. The tax rates for these taxes are 12.4 percent and 2.9 percent, respectively, and the tax base is net self-employment income. The self-employment tax is in addition to any federal income tax owed by the individual.
In addition to the Social Security and Medicare taxes, employers are also required to pay federal and state unemployment taxes, which fund temporary unemployment benefits for individuals terminated from their jobs without cause. The tax base for the unemployment taxes is also wages or salary.
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