How is self-employment tax calculated for individuals?

Self-employment tax is primarily calculated based on net earnings from self-employment. This is important because the self-employment tax is designed to cover Social Security and Medicare taxes for individuals who work for themselves. The IRS requires taxpayers to determine their net earnings, which is calculated by subtracting allowable business expenses from gross income.

Net earnings specifically refer to the income generated from self-employment activities minus the related costs incurred to generate that income. This means that only the actual profit from the business is subject to self-employment tax, rather than the total revenues or gross income before expenses are taken into account.

The other options address aspects that do not accurately align with how self-employment tax is defined or calculated. Gross income, business expenses, and estimations of future earnings do not represent the proper basis upon which self-employment tax is assessed, which reinforces the necessity of focusing on net earnings for a correct calculation.