Which statement about self-employment and taxes is TRUE?

The statement that you must pay both employee and employer shares of Social Security and Medicare tax is accurate because self-employed individuals are responsible for the entire self-employment tax, which includes both components that typically would be divided between an employer and an employee in a traditional job. When you are self-employed, the IRS treats you as both the employee and the employer, requiring you to pay the full amount of Social Security and Medicare taxes. This means that you effectively pay double the rate that a traditional employee would pay since they only contribute the employee share while their employer pays the employer share.

In addition, this requirement is a part of the self-employment tax framework designed to ensure that self-employed individuals contribute adequately to Social Security and Medicare programs. Being aware of these tax responsibilities is vital for anyone considering self-employment, as it impacts their financial planning and tax preparations.