Taxpayer asks:

Since the self-employment tax rate is 12.4 percent, why do I have to pay 15.3%?

taxgirl says:

Self-employment tax, sometimes called SE tax, is a tax consisting of Social Security and Medicare taxes for those who work for themselves. It’s the equivalent of the total of Social Security and Medicare taxes, sometimes called FICA taxes, withheld from an employee plus the amount paid out by an employer. In other words, the self-employed pay both parts (yes, there’s a credit but that’s a separate post). You figure SE tax by using Schedule SE on your form 1040.

The 12.4% figure you reference is the Social Security portion of the tax. You get to the 15.3% by adding in your contribution for Medicare taxes, which works out to 1.45% each for employer and employee, or 2.9% for self-employed. The total is 15.3% (12.4% + 2.9%).

The 15.3% does not apply to all self-employed wages. For 2011, the first $106,800 of your combined wages, tips, and net earnings are subject to the Social Security part of self-employment tax; the overage is not. There is no cap on Medicare taxes. Here’s a quick comparison:

Example 1: Your self-employment income is $100,000. All of the income would be subject to the full amount of taxes for Social Security taxes and Medicare which, in 2010, would have been $15,300 (15.3% of $100,000).

Example 2: Your self-employment income is $110,000. Your income to $106,800 is subject to Social Security tax of 12.4% on the first $106,800 plus Medicare taxes on the entire $110,000 which, in 2010, would have been $16,433.20 (12.4% of $106,800 + 2.9% of $110,000).

That said, for one year only, in 2011, there is a payroll tax holiday, which reduces payroll tax contributions. The break applies to the self-employed by the same 2%, so that instead of paying in at 6.2% for the “employee equivalent” part of the Social Security taxes, contributions are 4.2% for Social Security taxes. Contributions for Medicare remained the same. That makes the total 13.3% (4.2% + 6.2% + 1.45% + 1.45%) for 2011.

Assuming that nothing changes, the rate will go back to the full amount in 2012.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

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

1 Comment

  1. Hey Taxgirl..just came across your site for a random query about an incorrect 1099 and what to do when a doofus doesn’t want to correct it because it messes up the way they want to do their accounting. Just wanted to say thanks, like the blog, love the disclaimers!
    Tim

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