Hi,
In the US we have:
Federal Income Tax – form 1040 for individuals
State Income Tax – usually, tax preparers use a software that automatically generates the state returns based on the information entered to fill out the 1040 – state income tax is not tested on the exam.
Income tax is a fee that we all pay to the government for the “privilege” of earning money in this country and in our state. It is a percentage of the amount of money we earn. When employees start working for a company, they fill out a form that helps the company estimate how much Federal and State income tax the employee will owe at the end of the year. Then each paycheck will have a portion withheld so that the employee can afford their tax bill at the end of the year. The withheld amounts are paid to the government by the employer. When the individual files their tax return, on page 2 of 1040, they enter the amount they had withheld from paychecks (the amount they already paid), to arrive at the amount of tax due.
Then we have employment taxes, where the employee and the employer must pay based on salary amounts.
On our paychecks, we have withholdings for Social Security and Medicare.
Social Security withholdings are sent to the Federal government. When we retire, we start getting our Social Security withholdings back as a monthly living allowance. Employees pay in 6.2% of their salary for Social Security, and employers must also pay in 6.2% of each employee's salary.
Medicare is another social service; it provides healthcare for the elderly and disabled. Employees pay in 1.45% of their salary to fund these services, and employers also pay in 1.45% of each employee's salary.
If you work for a company, all of this is calculated, withheld, and paid into the government for you. The details are printed with your paycheck.
But, if you are self employed (meaning you report income and expenses on Schedule C of Form 1040), then you have to do it yourself.
In this case, you are both the employer and the employee, so there is double taxation happening with Social Security and Medicare.
To make it more fair, self employed individuals get an adjustment for 1/2 of the self employment (Social Security and Medicare) taxes on page 1 of Form 1040.
This is a really long explanation, but all you really need to know for the exam is that 1) there is a self employment tax that is calculated on Schedule C of Form 1040 and 2) there is a 50% adjustment to that tax on page 1 of Form 1040. I don't remember ever seeing any other questions in my review materials about self employment taxes except for these 2 concepts.
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