4. What is the self-employment tax (SECA) rate, and how does it compare to the combined employer and employee FICA tax rates for Social Security and Medicare?

• A. The SECA tax rate is 7.65%, which is half of the combined FICA tax rates.
• B. The SECA tax rate is 12.4%, which is higher than the combined FICA tax rates.
• C. The SECA tax rate is 15.3%, which is equal to the combined employer and employee FICA tax rates.
• D. The SECA tax rate is 6.2%, which is the same as the Social Security portion of FICA only.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of SECA (Self-Employment Contributions Act) tax. SECA tax is the tax paid by self-employed individuals to cover Social Security and Medicare contributions, similar to the FICA (Federal Insurance Contributions Act) tax paid by employees and employers.
2. Step 2: Break down the FICA tax rates. FICA consists of two components: Social Security tax (6.2% for employees and 6.2% for employers, totaling 12.4%) and Medicare tax (1.45% for employees and 1.45% for employers, totaling 2.9%). Combined, the FICA tax rate is 15.3%.
3. Step 3: Compare SECA tax to FICA tax. Self-employed individuals pay the full 15.3% SECA tax because they act as both the employer and the employee, whereas under FICA, the tax is split between the employer and employee.
4. Step 4: Clarify the relationship between SECA and FICA. The SECA tax rate of 15.3% is equal to the combined employer and employee FICA tax rates for Social Security and Medicare.
5. Step 5: Review the options provided in the problem and identify the correct answer based on the explanation above. The correct answer is: 'The SECA tax rate is 15.3%, which is equal to the combined employer and employee FICA tax rates.'