Which of the following statements is true about self-employment tax?

• A. It only covers income from rental properties
• B. It consists of Social Security and Medicare taxes for self-employed individuals
• C. It is voluntary for independent contractors
• D. It does not affect personal investments

Answer: (B)

The statement that self-employment tax consists of Social Security and Medicare taxes for self-employed individuals is accurate. Self-employment tax is designed to ensure that self-employed individuals contribute to Social Security and Medicare in a manner similar to employees who have these deductions taken directly from their paychecks. Specifically, it encompasses both the employer's and employee's share of Social Security and Medicare taxes, which totals 15.3% on net earnings from self-employment.

This tax is essential for self-employed individuals because it helps secure eligibility for various benefits, including retirement benefits under Social Security and health coverage under Medicare when they reach the appropriate age. Understanding this aspect of self-employment tax is crucial for anyone working as an independent contractor or running their own business, as it impacts their net income and tax obligations.

The other statements do not accurately reflect the nature of self-employment tax. It applies to earnings from all self-employment activities, not limited to rental property income. Additionally, the tax is not voluntary; it is a mandatory obligation for individuals earning income through self-employment. Personal investments also remain unaffected by self-employment tax unless the investment generates income that constitutes self-employment income.