Self-employment Tax


Z

zkeith

If one is obligated to pay self-employment tax because he/she has
business income and hasn't reached the maximum wage for for social
security contributions, I believe the SE percentage rate is 15.3
percent of the amount of business income. However, as I understand
the SE tax regulations, one receives a credit for half of that amount
as an adjustment to gross income. So if one is obligated to pay on
$15,000 of business income, then the SE tax is $2250 with a credit of
$1125. Therefore, the effective SE tax is $1125. Am I understanding
this correctly?
 
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A

Arthur Kamlet

If one is obligated to pay self-employment tax because he/she has
business income and hasn't reached the maximum wage for for social
security contributions, I believe the SE percentage rate is 15.3
It is 15.3% of Net Earnings From Self Employment.

For schedule C filers, the net Schedule C profit multiplied
by 0.9235 is Net Earnings from Self employment.

So the self employment tax is more like 15.3% x 0.9236 = 14.14%
of the net schedule C profit.

percent of the amount of business income. However, as I understand
the SE tax regulations, one receives a credit for half of that amount
as an adjustment to gross income. So if one is obligated to pay on
$15,000 of business income, then the SE tax is $2250 with a credit of
$1125. Therefore, the effective SE tax is $1125. Am I understanding
this correctly?

Almost.


But, sorry, not close enough.


The 1/2 of SE tax is applied as an Adjustment to Income, on
page 1 of form 1040, and not as a tax credit.


In some cases, the adjustment is worth nothing. But in any case,
it reduces adjusted gross income, while the SE tax is an actual tax.
 
R

removeps-groups

If one is obligated to pay self-employment tax because he/she has
business income and hasn't reached the maximum wage for for social
security contributions, I believe the SE percentage rate is 15.3
percent of the amount of business income. However, as I understand
the SE tax regulations, one receives a credit for half of that amount
as an adjustment to gross income. So if one is obligated to pay on
$15,000 of business income, then the SE tax is $2250 with a credit of
$1125. Therefore, the effective SE tax is $1125. Am I understanding
this correctly?
Even if you've reach the maximum for social security tax, there's
still the medicare tax, which is 1.45*2=2.90%. Medicare has no cap.

The so called "credit" of $1125 above reduces your taxable income, and
if you're in the 25% credit, the real credit is 25% of $1125. Your
state tax is similarly reduced.
 
R

removeps-groups

The so called "credit" of $1125 above reduces your taxable income, and
if you're in the 25% credit, the real credit is 25% of $1125. Your
state tax is similarly reduced.
Actually, the effect may be more complex. Reducing your AGI may will
reduce the phaseout of the exemption (so your exemption will be
higher, but this only applies to higher income taxpayers), medical
deduction (you can only deduct the amount above 7.5% of your AGI so of
your AGI is reduced then the deduction is more), itemized deduction
(the itemized deduction is phased out but not fully for higher income
taxpayers and the phaseout is higher if your AGI is higher), AMT
exemption (similar concept to the above, more of your income is
subject to AMT if your AGI is higher), deductible rental loss may be
higher, etc, etc. A computer program will tell you for sure what
happens in your situation, but the 25% of $1125 is a good starting
point.
 
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H

Harlan Lunsford

Even if you've reach the maximum for social security tax, there's
still the medicare tax, which is 1.45*2=2.90%. Medicare has no cap.

The so called "credit" of $1125 above reduces your taxable income, and
if you're in the 25% credit, the real credit is 25% of $1125. Your
state tax is similarly reduced.
Now that depends on the state.

Alabama doesn't recognize such an adjustment like federal does.
Instead, IF one itemizes deductions, he gets to deduct the FICA tax or
SE tax, whichever. Or both if applicable.

ChEAr$,
Harlan Lunsford, EA n LA
 

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