Tax Issues 7
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What is self-employment tax?
Self-employment tax is a combination of Social Security and Medicare taxes. When you are an employee in someone else's company, Social Security and Medicare contributions are withheld from each paycheck you receive. These withholdings are called FICA (Federal Insurance Contributions Act) and are matched by equal amounts your employer must contribute on your behalf.
When you are self-employed, you have to pay both the employee's share and the employer's share of these taxes. To compensate somewhat for this double whammy, you get a slight break on Schedule C (in the form of an adjustment to self-employed income), and you can subtract an amount equal to one-half of your self-employment tax from your income on line 27, Form 1040 (adjustments to income).
Like FICA withholdings, self-employment tax is calculated on Schedule SE separately from and in addition to any income tax you owe
How much is the self-employment tax?
The self-employment tax rate is a percentage of income based on two separate rates--one for Social Security and one for Medicare. For the 2003 tax year, the Social Security rate was 12.4 percent on the first $87,000 of net self-employment income. The Medicare tax rate was 2.9 percent of all net self-employment income Thus the total self, employment tax rate works out to be 15.3 percent of the first $87,000 of net self-employment income (12.4 percent + 2.9 percent) plus 2.9 percent of all additional net self-employment income.
The rules and income ranges change periodically, so be sure to check the actual rates each year you have self- employment income
I have a full, time job and work for myself on the weekends. My full-time employer withholds FICA from my salary. Do I have to pay self-employment tax, too?
Yes. Here's how it works. If the wages from your full-time job are under $87,000 you will have to pay self-employment tax on the difference between the wages from your job and $87,000. You have to pay the 2.9 percent Medicare portion of the tax on all of your self-employment income.
For instance, suppose you earn $45,000 at your full-time job, and have additional net self-employment earnings of $52,000. The maximum income for the 15.3 percent self-employment tax rate is $87,000. The $45,000 in wages (which have had FICA withheld) is applied toward that maximum first. You pay the 12.4 percent rate Social Security portion of the tax on combined income up to the $87,000 Social Security income maximum; you pay the 2.9 percent Medicare rate on all of your net self-employment income. Thus:
$87,000 (maximum subject to self, employment tax)
– $45,000 (wages)
$42,000 (amount of net self-employment earnings subject to the 12.4 percent Social Security portion of the tax
) The total self, employment tax you would owe on the $52,000 you made on your own would be:
$42,000 x 12.4% (Social Security portion) = $5,208
PLUS
$52,000 (total net self-employment earnings) x 2.9% (Medicare rate) = $1508
Total self-employment tax due: $5,208 + $1508 = $6716
Do I have to pay self, employment tax if I'm retired?
The same rules apply whether you are retired or not. Thus, if you make more than $400 in profit from self-employment you are liable for self-employment taxes even if you are already collecting Social Security.
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