C

#### Casey

I have been self-employed for a few years, and I understand

how to calculate the SE tax. I have a question about the

implementation of one step that we take, specifically, the

way we arrive at net earnings. Perhaps someone can enlighten

me.

Currently, we multiply our net profit by .9235. I

understand that the idea behind doing this is to remove the

self-employment earnings that are really the *employer's*

share of the taxes so that we don't have to pay SE tax on

those as well. However, this to me means that the total

amount of taxes paid is slightly less than under a regular

employer/employee set up. It would seem more accurate to me

if, instead of multiplying by .9235, we divided by 1.0765.

Suppose person A is employed by firm B and has W-2 wages of

$50K.

Person A fica withheld: 50K * .0765 = $3825

Firm B matching withholding: $3825

The total money involved here is $53825 (this is the cost to

the firm of employing person B), and the IRS collects $7650.

Now, let's assume that person C is a self-employed

individual with Schedule C profits of $53825--we would

imagine that the end results would be the same, but they

aren't, because the 92.35% adjustment (to remove the

employer's contribution) actually removes *more* than the

employer paid in the previous example:

$53825 * .9235 = $49707

$49707 * .153 = $7605 (total that the IRS collects)

You can see that Person C pays his/her 15.3% on a slightly

smaller amount (49707) than A+B pay their taxes. This is

because with C, the 7.65% tax that is removed is 7.65% of

the *entire* amount (i.e. it includes the salary of A plus

the taxes paid of B) instead of just removing the taxes that

would have been paid in the previous scenario (which would

be B's taxes paid: 7.65% of A = $3825).

Dividing $53825 by 1.0765 instead of multiplying by .9235

would solve this problem.

Does anyone else agree with that, or am I missing something

basic here? I would appreciate anyone filling me in. Of

course, as a self-employed person, I'm not complaining about

this; I am just trying to figure out *why* it is.

Of course, if I've been unclear, please let me know.

Thanks,

-Casey

how to calculate the SE tax. I have a question about the

implementation of one step that we take, specifically, the

way we arrive at net earnings. Perhaps someone can enlighten

me.

Currently, we multiply our net profit by .9235. I

understand that the idea behind doing this is to remove the

self-employment earnings that are really the *employer's*

share of the taxes so that we don't have to pay SE tax on

those as well. However, this to me means that the total

amount of taxes paid is slightly less than under a regular

employer/employee set up. It would seem more accurate to me

if, instead of multiplying by .9235, we divided by 1.0765.

Suppose person A is employed by firm B and has W-2 wages of

$50K.

Person A fica withheld: 50K * .0765 = $3825

Firm B matching withholding: $3825

The total money involved here is $53825 (this is the cost to

the firm of employing person B), and the IRS collects $7650.

Now, let's assume that person C is a self-employed

individual with Schedule C profits of $53825--we would

imagine that the end results would be the same, but they

aren't, because the 92.35% adjustment (to remove the

employer's contribution) actually removes *more* than the

employer paid in the previous example:

$53825 * .9235 = $49707

$49707 * .153 = $7605 (total that the IRS collects)

You can see that Person C pays his/her 15.3% on a slightly

smaller amount (49707) than A+B pay their taxes. This is

because with C, the 7.65% tax that is removed is 7.65% of

the *entire* amount (i.e. it includes the salary of A plus

the taxes paid of B) instead of just removing the taxes that

would have been paid in the previous scenario (which would

be B's taxes paid: 7.65% of A = $3825).

Dividing $53825 by 1.0765 instead of multiplying by .9235

would solve this problem.

Does anyone else agree with that, or am I missing something

basic here? I would appreciate anyone filling me in. Of

course, as a self-employed person, I'm not complaining about

this; I am just trying to figure out *why* it is.

Of course, if I've been unclear, please let me know.

Thanks,

-Casey

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