What is the purpose of self-employment tax?

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The purpose of self-employment tax is to pay for Social Security and Medicare taxes. When individuals work as independent contractors or self-employed individuals, they do not have an employer withholding these taxes from their income. Instead, they are responsible for paying both the employer and employee portions of Social Security and Medicare taxes through self-employment tax.

By paying this tax, self-employed individuals ensure their eligibility for social security benefits during retirement and Medicare coverage for healthcare. This system creates a safety net similar to that available to employees who have these taxes withheld from their paychecks.

Other options may imply different purposes, such as funding unemployment benefits or covering state tax obligations, but these are not the functions of self-employment tax. It specifically addresses the self-employed individual's contribution to federal social insurance programs.

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