Working for Yourself by Stephen Fishman J.D. (Nolo)

Author:Stephen Fishman, J.D. (Nolo)
Language: eng
Format: mobi
Published: 2011-02-04T21:58:33+00:00

2010. She must pay both Social Security and

Medicare taxes on the first $106,800 of her

Sole proprietors, partners in partnerships, and

income—a 15.3% tax. She must also pay the

members of limited liability companies must all pay

2.9% Medicare tax on her remaining $52,500 in

selfemployment taxes if their net earnings from

income.

selfemployment are $400 or more for the year.

Corporations do not pay SE taxes. However, if

you’re incorporated and work as an employee of

your corporation, you will ordinarily be paid a

salary on which you must pay FICA taxes, just like

any other employee. You do not pay SE taxes. Your

corporation, however, must withhold half of your

Social Security and Medicare taxes from your salary

and pay the other half. (See Chapter 6.)

CHAPTER 10 | THE BANE OF SELFEMPLOYMENT TAXES | 171

Higher Medicare Taxes in 2013

Earnings Subject to SE Taxes

You pay selfemployment taxes on your net self Starting in 2013, Medicare taxes for high-income

employment income, not your entire income. To

taxpayers are scheduled to go up by 0.9% to 3.8%.

determine your net selfemployment income, you

The increase applies to individual filers with more

must first figure out the net income you’ve earned

than $200,000 in net selfemployment income. If

from your business. Your net business income

the taxpayer is married and files a joint return, the

includes all income from your business, minus

increase kicks in at $250,000. Thus, for example,

all business deductions allowed for income tax

a single person with selfemployment income of

purposes. However, you can’t deduct retirement

$300,000 would pay a 2.9% Medicare tax on the

contributions you make for yourself to a Keogh

first $200,000 in income and 3.8% on the remaining

or SEP plan or the selfemployed health insurance

$100,000.

deduction. If you’re a sole proprietor, as are most

Unlike the other selfemployment taxes discussed

selfemployed people, use IRS Schedule C, Profit or

above, you can’t deduct the increased Medicare

Loss From Business, to determine your net business

payments from your income taxes.

income.

The increase applies to employees as well as to

If you have more than one business, combine

the selfemployed. Employees will have to pay the

the net income or loss from them all. If you have

entire increase out of their own pockets. Thus,

a job in addition to your business, your employee

employers will continue to pay a 1.45% Medicare

income is not included in your selfemployment

tax on their employees’ wages. Employees will

income. Nor do you include investment income,

continue to pay 1.45% until their wages reach the

such as interest you earn on your savings.

$200,000 or $250,000 ceiling, when they will have to

You then get one more valuable deduction before

pay the entire additional 2.35%.

determining your net selfemployment income:

In addition, starting in 2012, high-income

You’re allowed to deduct 7.65% from your total

taxpayers will have to pay Medicare taxes on

net business income. This is intended to help ease

investment income as well as on wages and

the tax burden on the selfemployed. To do this,

selfemployment income. A 3.8% Medicare

multiply your net business income by 92.35%, or

contribution tax will be imposed on the lesser of

0.9235.

(1) the taxpayer’s net investment income, or (2)

any excess of modified adjusted gross income over

ExAmPlE:

$200,000 ($250,000 for married taxpayers filing

Billie, a selfemployed consultant, earned

jointly). Net investment income consists of net

$70,000 from her business

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