What type of tax do self-employed individuals pay, covering Social Security and Medicare taxes?

Self-employed individuals are required to pay the Self Employment Tax, which encompasses both Social Security and Medicare taxes. This tax is specifically designed for those who earn income from self-employment rather than traditional wages. When an individual is self-employed, they assume the dual role of both the employer and the employee; therefore, they must contribute both portions of the payroll taxes that would normally be split between an employer and employee.

The Self Employment Tax is calculated on net earnings from self-employment, and it ensures that self-employed individuals receive the necessary coverage for Social Security benefits and Medicare when they retire or if they require medical care later in life. This tax reflects the commitment to participate in the social insurance programs that provide for health and retirement security.

In contrast, the other types of taxes mentioned do not address the unique needs of self-employed individuals. Corporate Tax pertains to profits earned by corporations and does not apply to self-employment income. Payroll Tax is a term generally associated with taxes withheld from employees' wages, while Capital Gains Tax relates to the profit made from the sale of investments or assets. These other forms of taxation do not have the same focus on responding to the social security and healthcare needs of self-employed taxpayers.