Self-employed wage earners are accustomed to being hit with a double dose of FICA at tax time.
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Unlike wage earners who work for employers, self-employed wage earners pay both the employer's and the employee's share of FICA taxes.
Social security taxes comprise part of the FICA tax requirement. The FICA rate is 15.3% (12.4% social security tax and 2.9% Medicare tax). If you are self-employed and earn more than $400 during the tax year, you are responsible for reporting earnings on Schedule SE. The upside is that your net taxable earnings are reduced by half of the amount of social security tax you pay. Is the deduction as beneficial as having an employer cover half of your FICA liability? No – but the net income deduction will reduce your overall tax liability.
In 2011, self-employed wage earners will benefit from another tax reduction thanks to federal legislation that was passed in the final days of 2010. Working in tandem with the White House, Congress approved the continuation of the Bush-era tax cuts and added a few new wrinkles for 2011, including a reduction in the social security tax rate.
2011 Self-Employed Social Security Tax Rate
Without the intervention of Congress, the social security tax rate for self-employed individuals would have remained at 15.3% up to $106,800 of income. Earners would have still been required to pay Medicare taxes for income over $106,800, but the only limitation on their FICA burden would have been the Social Security Wage Base threshold.
Under the revised tax code for 2011, employees' will receive a 2% reduction in the employee portion of social security tax. So instead of paying 6.2% of their gross income, they are only required to pay 4.2% for the 2011 tax year.
Self-employed taxpayers pay both the employer and employee share of FICA. Subsequently, self-employed taxpayers will also receive a 2% reprieve in social security tax for 2011. However, the wage base was held constant, so the threshold of $106,800 will remain in effect. Also, taxpayers will be continue to be responsible for the Medicare normal portion of FICA, even after they breach the wage base threshold.