November 23, 2011
Comparison of FICA & Self Employed Tax
The concept behind Social Security Taxes is that unless you work for the government or some non-profit organizations, all workers are required to pay into the Social Security system. Employees have FICA (Social Security and Medicare) Tax withheld from their wages. Employers have to contribute so as to match the amount withheld.
Now comes the Self Employment Tax- Individuals with “net earnings from self-employment” pay the Self-Employment Tax – which in fact is a FICA Tax. But the major difference is that the self employed person must pay “both halves” of the FICA tax (the equivalent of the employee’s share and the employer’s share).
Actually, the self-employed individuals pay only 14.13% on “net earnings from self-employment”, as the 15.3% is only applied to 92.35% of their net Schedule E (or K-1) earnings. Plus they are allowed an “above-the-line” deduction for half of their Self-Employment Tax – so the actual effective tax rate depends on their federal income tax rate.Considering the 50% self-employment tax adjustment to income, the “effective” cost of your self-employment tax is –
* 15% Bracket = 13.07%
* 25% Bracket = 12.36%
* 28% Bracket = 12.15%
There are several ways you can save from hit by high self employed taxes. Try to take deductions that are very unique to the self-employed category. In this category, it includes deductions like-
- special retirement accounts, that can be funded up to April 15th,
- your home office,
- several vehicle expenses ,
- health insurance or HSA deductions and
- depreciation of assets owned by you.
Wishing all the tax payers a very healthy tax season, hope you all get a very good refund!
