Does The Payroll Tax Holiday Apply To The Self-Employed?

I have received a number of questions about the Payroll Tax Holiday and how it applies to those who are self-employed. I wasn’t sure, initially, so I did what I always do (and what I recommend that you do) and I went straight to the source.

The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act, which was signed into law on December 17, 2010, created the Payroll Tax Holiday at section 601 of the bill, Temporary Employee Payroll Tax Cut. The text is as follows:

(a) In General- Notwithstanding any other provision of law–

(1) with respect to any taxable year which begins in the payroll tax holiday period, the rate of tax under section 1401(a) of the Internal Revenue Code of 1986 shall be 10.40 percent, and

(2) with respect to remuneration received during the payroll tax holiday period, the rate of tax under 3101(a) of such Code shall be 4.2 percent (including for purposes of determining the applicable percentage under sections 3201(a) and 3211(a)(1) of such Code).
….

You’ll note that they don’t actually use the term “employee” when discussing the tax. At subparagraph (a), the law references existing law under the Tax Code (Title 26, Subtitle A, Chapter 2, section 1401(a)) which establishes the self-employment tax. That part of the law, at section 1401(a) says:

In addition to other taxes, there shall be imposed for each taxable year, on the self-employment income of every individual, a tax equal to the following percent of the amount of the self-employment income for such taxable year:
…
December 31, 1989 12.40%

So putting that all together, the new law provides that the “normal” tax rate for the self-employed of 12.4% is reduced to 10.4%. That means yes, it does apply to the self-employed. Voila.

Kelly Phillips Erb

Kelly Phillips Erb is a tax attorney, tax writer, and podcaster.

See Full Bio