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Self-Employment Tax
The Social Security and Medicare tax that self-employed individuals pay on their business income.
Definition
Self-employment tax covers the Social Security (12.4%) and Medicare (2.9%) taxes that employers and employees normally split. Self-employed individuals pay both halves, totaling 15.3% on net self-employment income up to the Social Security wage base, and 2.9% on income above that threshold. A key benefit of rental real estate is that rental income is generally not subject to self-employment tax, unlike income from a business in which you materially participate. However, certain real estate activities — like flipping houses as a business, short-term rental management, or real estate development — may trigger self-employment tax. Proper entity structuring can help minimize self-employment tax exposure.
Related Terms
Active Income
Income earned through active work, such as wages, salaries, or business income from material participation.
Passive Income
Income from rental properties or businesses in which the taxpayer does not materially participate.
S-Corp
A corporation that passes income to shareholders' personal tax returns, avoiding double taxation.
LLC
A Limited Liability Company — a business structure that separates personal assets from investment property liability.
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