Which of the following types of income is typically subject to self-employment tax?

• A. Salaries from an employer
• B. Passive income from rental properties
• C. Income from freelance work or business activities
• D. Dividend income from investments

Answer: (C)

Income from freelance work or business activities is typically subject to self-employment tax because it involves earnings from self-employed individuals who do not receive a traditional paycheck. Self-employment tax is designed to cover Social Security and Medicare contributions for those who work for themselves, unlike employees whose taxes are withheld by their employers.

In this context, freelancers, independent contractors, and business owners report their income on Schedule C and are responsible for calculating and paying their own self-employment tax, which is approximately 15.3% on net earnings. This ensures that individuals who are self-employed contribute to the social safety net in a similar manner to those who work for an employer.

Conversely, salaries from an employer are subject to different withholding procedures, passive income from rental properties generally falls under investment income with specific tax rules, and dividend income from investments is subject to taxes but not self-employment taxes.