SELF-EMPLOYMENT TAX ON BUSINESS INCOME
@066 CHAP ZZ
ÚÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ¿
³ SELF-EMPLOYMENT TAX ON BUSINESS INCOME ³
ÀÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÙ
"The difference between a taxidermist and a tax
collector is that the taxidermist leaves the
skin." -- Ancient American proverb
The self-employment tax is a very painful tax on individuals who earn
income from self-employment (we speak from personal experience). As
though one were not already afflicted with federal income taxes (and
state income taxes in many states) and other business taxes too numer-
ous to mention, the self-employment tax takes another 15.3% (1992 rate)
of your income, right off the top, and it's not even deductible for
income tax or other purposes. Ouch! Furthermore, only your business
deductions, plus an amount equal to the S/E tax on half of your S/E
income, are allowable in reducing the self-employment income that is
subject to this cruel tax. All those nice deductible items we all use
to reduce our income tax, like home mortgage interest, real estate
taxes, state income tax, Keogh plan or IRA deductions, etc. are of no
benefit whatsoever in reducing the bite of the self-employment tax.
The self-employment tax is the non-employee portion of the Social
Security tax-raising system. It is what we pay now as self-employed
persons (in lieu of the FICA taxes paid by employees--and their
employers) in order to earn Social Security benefits at some distant
date in the future, when we retire--by which time the politicians will
have surely squandered every last $billion of the temporary surpluses
the Social Security fund is supposed to generate for the next 15 or 20
years.
Perhaps the only good thing to be said for this tax is that the full
15.3% tax only applies to the first $55,500 of one's self-employment
income. Only the medicare portion of the tax (2.9% rate) applies to
income above $55,500, on up to $130,200 of self-employment income.
The maximum S/E tax liability for an individual is thus $10658 in
1992, up from a maximum of $10,247 in 1991. (Actually, you must have
self-employment income of somewhat over $130,200 to pay the maximum
S/E tax, since up to half of the hypothetical S/E tax on total S/E
income is deductible from S/E income.)
Before 1990, you could usually save money on this particular tax by
incorporating your business. As a corporation, any salary you paid
yourself before 1990 was subject to both individual and corporate FICA
taxes at a combined tax rate of slightly higher than the rate for S/E
tax, but the higher FICA rate was mitigated by the fact that the
employer's half of the FICA tax was all deductible for corporate
income tax purposes, which reduced the net after-tax cost of the FICA
considerably, particularly if the corporation was in a high corporate
tax bracket.
This difference in tax treatment disappeared in 1990, when both the
S/E tax and the combined FICA tax rates were increased to 15.3%.
But now one-half of the S/E tax has become deductible, both for income
AND S/E tax purposes, thus putting self-employed persons on the same
footing as incorporated ones for Social Security (FICA and S/E) tax
purposes.
Note that for some kinds of businesses, such as rentals, there is no
self-employment tax, so that there can be a considerable advantage in
operating those types of businesses as sole proprietorships or partner-
ships, rather than corporations. (Any wages you pay yourself as a
corporate employee are subject to FICA tax, regardless of the source
of the corporation's earnings used to pay you such wage or salary.)
Interest income is also exempt from S/E tax.
There is no separate tax return for paying self-employment tax. You
simply compute the tax on Schedule SE and attach it to your federal
individual income tax form (Form 1040). The S/E tax is added to your
income tax on the Form 1040, and must be figured into your estimated
tax payments as though it were income tax, in order to avoid penalties
for underpayment of your estimated tax.
@CODE: LS
In @STATE, self-employment is a crime that is likely to earn
you a nocturnal visit from a government death squad.
@CODE:OF
ÚÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ¿
³ SELF-EMPLOYMENT TAX ON BUSINESS INCOME ³
ÀÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÙ
"The difference between a taxidermist and a tax
collector is that the taxidermist leaves the
skin." -- Ancient American proverb
The self-employment tax is a very painful tax on individuals who earn
income from self-employment (we speak from personal experience). As
though one were not already afflicted with federal income taxes (and
state income taxes in many states) and other business taxes too numer-
ous to mention, the self-employment tax takes another 15.3% (1992 rate)
of your income, right off the top, and it's not even deductible for
income tax or other purposes. Ouch! Furthermore, only your business
deductions, plus an amount equal to the S/E tax on half of your S/E
income, are allowable in reducing the self-employment income that is
subject to this cruel tax. All those nice deductible items we all use
to reduce our income tax, like home mortgage interest, real estate
taxes, state income tax, Keogh plan or IRA deductions, etc. are of no
benefit whatsoever in reducing the bite of the self-employment tax.
The self-employment tax is the non-employee portion of the Social
Security tax-raising system. It is what we pay now as self-employed
persons (in lieu of the FICA taxes paid by employees--and their
employers) in order to earn Social Security benefits at some distant
date in the future, when we retire--by which time the politicians will
have surely squandered every last $billion of the temporary surpluses
the Social Security fund is supposed to generate for the next 15 or 20
years.
Perhaps the only good thing to be said for this tax is that the full
15.3% tax only applies to the first $55,500 of one's self-employment
income. Only the medicare portion of the tax (2.9% rate) applies to
income above $55,500, on up to $130,200 of self-employment income.
The maximum S/E tax liability for an individual is thus $10658 in
1992, up from a maximum of $10,247 in 1991. (Actually, you must have
self-employment income of somewhat over $130,200 to pay the maximum
S/E tax, since up to half of the hypothetical S/E tax on total S/E
income is deductible from S/E income.)
Before 1990, you could usually save money on this particular tax by
incorporating your business. As a corporation, any salary you paid
yourself before 1990 was subject to both individual and corporate FICA
taxes at a combined tax rate of slightly higher than the rate for S/E
tax, but the higher FICA rate was mitigated by the fact that the
employer's half of the FICA tax was all deductible for corporate
income tax purposes, which reduced the net after-tax cost of the FICA
considerably, particularly if the corporation was in a high corporate
tax bracket.
This difference in tax treatment disappeared in 1990, when both the
S/E tax and the combined FICA tax rates were increased to 15.3%.
But now one-half of the S/E tax has become deductible, both for income
AND S/E tax purposes, thus putting self-employed persons on the same
footing as incorporated ones for Social Security (FICA and S/E) tax
purposes.
Note that for some kinds of businesses, such as rentals, there is no
self-employment tax, so that there can be a considerable advantage in
operating those types of businesses as sole proprietorships or partner-
ships, rather than corporations. (Any wages you pay yourself as a
corporate employee are subject to FICA tax, regardless of the source
of the corporation's earnings used to pay you such wage or salary.)
Interest income is also exempt from S/E tax.
There is no separate tax return for paying self-employment tax. You
simply compute the tax on Schedule SE and attach it to your federal
individual income tax form (Form 1040). The S/E tax is added to your
income tax on the Form 1040, and must be figured into your estimated
tax payments as though it were income tax, in order to avoid penalties
for underpayment of your estimated tax.
@CODE: LS
In @STATE, self-employment is a crime that is likely to earn
you a nocturnal visit from a government death squad.
@CODE:OF
Comments
Post a Comment