What does "self-employment tax" fund?

Self-employment tax is specifically designed to fund two significant programs within the federal government: Social Security and Medicare. When individuals are self-employed, they are responsible for paying both the employer and employee portions of FICA taxes, which include contributions to both of these programs. This self-employment tax ensures that self-employed individuals contribute to their future Social Security benefits, including retirement, disability, and survivor benefits, as well as Medicare, which provides health coverage primarily for individuals aged 65 and older.

The structure of the self-employment tax is reflective of the way payroll taxes are collected from employees and employers. While employees have their contributions deducted from their paychecks and matched by their employers, self-employed individuals pay an equivalent amount through the self-employment tax.

The other options do not encompass the scope of the self-employment tax. For example, while self-employment tax does not fund state unemployment benefits, those benefits are typically financed through state taxes on employers. The self-employment tax specifically focuses on contributions for federal programs, which is why saying it only funds either Social Security or Medicare alone does not portray the full picture.