What does self-employment tax primarily fund?

Self-employment tax primarily funds Social Security and Medicare benefits. When individuals are self-employed, they are required to pay this tax, which encompasses both the employer and employee portions of Social Security and Medicare taxes. This means that self-employed individuals contribute to the Social Security system, which provides benefits to retirees, disabled individuals, and survivors of deceased workers, as well as to Medicare, which offers health insurance to individuals aged 65 and older and certain younger individuals with disabilities.

The structure of the self-employment tax ensures that those who are self-employed are contributing to the same benefits that employees receive from their employers, thereby maintaining their eligibility for these critical programs. Understanding the purpose of the self-employment tax highlights its role in supporting the social safety net for retirees and the medical needs of older adults.

Other options, such as pension plans for retired individuals, unemployment benefits, and workers’ compensation claims, are not directly funded by self-employment tax. While these programs serve important functions within the labor market and provide necessary support for workers, they are funded by different sources and mechanisms, such as employer contributions or state taxes, rather than through the self-employment tax structure.