Author Topic: Self-employed: Are FICA taxes in addition to Tax Rates?  (Read 7099 times)

Anti-ComplainyPants

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Self-employed: Are FICA taxes in addition to Tax Rates?
« on: April 15, 2015, 01:24:12 PM »
I haven't found a simple answer elsewhere on the Web, so I entrust it to my fellow Mustacians:

I've recently acquired a side gig that will be considered self-employment. According to the info I found here (http://www.ssa.gov/news/press/factsheets/colafacts2015.html) it seems that I'll have to pay 15.3% in Medicare and Social Security taxes. Is this in addition to my standard tax bracket?

In other words, if I remain in the 15% tax bracket, is my income from self-employment about to be taxed at 30.3% (15.3% + 15%)? And if it bumps me into the 25% margin, a whopping 40.3%!?!??

Thank you for the clarification!

GizmoTX

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Re: Self-employed: Are FICA taxes in addition to Tax Rates?
« Reply #1 on: April 15, 2015, 01:35:43 PM »
Federal income tax withholding (your "tax bracket") is in addition to FICA (SS & Medicare).

If you were getting a paycheck from an employer, 50% of your total SS & Medicare taxes would be withheld from you, & the other 50% is paid by your employer. The employer side is considered part of your total compensation. The employer also pays FUTA (unemployment insurance) & usually worker's compensation insurance.

Since a self-employed person is also the employer, s/he pays both sides of FICA.

It is a shock to see how much the total tax comes to.

beltim

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Re: Self-employed: Are FICA taxes in addition to Tax Rates?
« Reply #2 on: April 15, 2015, 01:36:36 PM »
In short, yes.  There's one slight tweak: half of your FICA (corresponding to the "employer" portion) is deductible.  You can go through the estimated tax worksheet at http://www.irs.gov/pub/irs-pdf/f1040es.pdf - page 6 - to figure your self-employment tax.

Anti-ComplainyPants

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Re: Self-employed: Are FICA taxes in addition to Tax Rates?
« Reply #3 on: April 15, 2015, 02:38:39 PM »
Thanks for the info guys!

That is.... a huge drag. It's tempting to throw my hands up with the idea when I learn that I'll only keep just over half to two-thirds of what I'll make. But sticking with my Forum Handle, looks like I'll just be taking this in stride.

jzb11

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Re: Self-employed: Are FICA taxes in addition to Tax Rates?
« Reply #4 on: April 15, 2015, 02:42:42 PM »
Thanks for the info guys!

That is.... a huge drag. It's tempting to throw my hands up with the idea when I learn that I'll only keep just over half to two-thirds of what I'll make. But sticking with my Forum Handle, looks like I'll just be taking this in stride.

I feel your pain. My attempt to minmize the hurt is to use a SEP and contribute as much as I can on the employee/employer side.

terran

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Re: Self-employed: Are FICA taxes in addition to Tax Rates?
« Reply #5 on: April 15, 2015, 02:55:24 PM »
It is a drag, but remember that as an employee you also have to pay 7.65% FICA tax in addition to "regular" taxes, so you're really only paying an additional 7.65% as compared to being an employee.

Anti-ComplainyPants

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Re: Self-employed: Are FICA taxes in addition to Tax Rates?
« Reply #6 on: April 15, 2015, 03:24:08 PM »
It is a drag, but remember that as an employee you also have to pay 7.65% FICA tax in addition to "regular" taxes, so you're really only paying an additional 7.65% as compared to being an employee.

Good point!

After using the form from beltim, at least I shouldn't have to make estimated payments.

I'm also using all of the self-employed cash to max out my T-IRA. As soon as I do, I'm going to have the amount I make from self-employment held from my regular-job paycheck and put straight into my 403(b). So the extra income won't even count as extra taxable income - I'll just have to pay the extra self-employed taxes on the self-employed income. AND I should stay in the 15% tax bracket. Not too shabby

seattlecyclone

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Re: Self-employed: Are FICA taxes in addition to Tax Rates?
« Reply #7 on: April 15, 2015, 04:26:32 PM »
Be aware that when you're an employee, the employer has to pay 7.65% behind the scenes in addition to the 7.65% you see coming out of your paycheck. It's a rather brilliant sleight-of-hand to make people believe their taxes are lower than they really are.

When you're self-employed, you play the role of the employer and the employee, so you get to pay both halves of the tax. You even get to subtract half of the self-employment tax from your AGI so that you don't get taxed more than an employee would.

terran

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Re: Self-employed: Are FICA taxes in addition to Tax Rates?
« Reply #8 on: April 15, 2015, 04:56:38 PM »
I'm also using all of the self-employed cash to max out my T-IRA. As soon as I do, I'm going to have the amount I make from self-employment held from my regular-job paycheck and put straight into my 403(b). So the extra income won't even count as extra taxable income - I'll just have to pay the extra self-employed taxes on the self-employed income. AND I should stay in the 15% tax bracket. Not too shabby

If you could afford to put more away you could open up a SEP IRA to put 20% of your self employed income into, and still contribute to a traditional IRA, and your 403(b). And there's one of the benefits of self-employed income: more tax advantaged space!

johnhenry

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Re: Self-employed: Are FICA taxes in addition to Tax Rates?
« Reply #9 on: April 16, 2015, 12:42:39 PM »
Thanks for the info guys!

That is.... a huge drag. It's tempting to throw my hands up with the idea when I learn that I'll only keep just over half to two-thirds of what I'll make. But sticking with my Forum Handle, looks like I'll just be taking this in stride.

I'll sing along with the lament about the the MC and SS payroll taxes.  Ya if you are self employed you pay the employee portion AND the employer portion, and that stinks.

But concerning the federal tax bracket and marginal rates: NO! This seems to be another case of misunderstanding about marginal tax rates/brackets!!!  You don't calculate your total federal income tax liability by adding the payroll tax % to your marginal tax bracket % and multiplying that by your income!!!

Have a look at the recent thread about effective federal tax rates to see what % some of your peers pay in federal income tax.

http://forum.mrmoneymustache.com/ask-a-mustachian/effective-federal-income-tax-rate/msg617998/#msg617998

beltim

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Re: Self-employed: Are FICA taxes in addition to Tax Rates?
« Reply #10 on: April 16, 2015, 12:52:26 PM »
But concerning the federal tax bracket and marginal rates: NO! This seems to be another case of misunderstanding about marginal tax rates/brackets!!!  You don't calculate your total federal income tax liability by adding the payroll tax % to your marginal tax bracket % and multiplying that by your income!!!

The OP didn't do that.  They specifically were talking about the tax on their self-employment income, which is in addition to another job (they specifically said the self-employment was their side gig).  So their tax rate on the extra (i.e. "marginal") income is exactly the sum of their FICA and federal (and state, if applicable) taxes, subject to the slight modifications listed above.

johnhenry

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Re: Self-employed: Are FICA taxes in addition to Tax Rates?
« Reply #11 on: April 16, 2015, 01:26:58 PM »
Quote
In other words, if I remain in the 15% tax bracket, is my income from self-employment about to be taxed at 30.3% (15.3% + 15%)? And if it bumps me into the 25% margin, a whopping 40.3%!?!??

Quote
That is.... a huge drag. It's tempting to throw my hands up with the idea when I learn that I'll only keep just over half to two-thirds of what I'll make. But sticking with my Forum Handle, looks like I'll just be taking this in stride.

Those statements make it sound (to me) like the OP is under the impression it's all or none.  Otherwise there would be meaningful discussion about how much space he actually has left in the 15% bracket.


beltim

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Re: Self-employed: Are FICA taxes in addition to Tax Rates?
« Reply #12 on: April 16, 2015, 01:32:14 PM »
Quote
In other words, if I remain in the 15% tax bracket, is my income from self-employment about to be taxed at 30.3% (15.3% + 15%)? And if it bumps me into the 25% margin, a whopping 40.3%!?!??

Quote
That is.... a huge drag. It's tempting to throw my hands up with the idea when I learn that I'll only keep just over half to two-thirds of what I'll make. But sticking with my Forum Handle, looks like I'll just be taking this in stride.

Those statements make it sound (to me) like the OP is under the impression it's all or none.  Otherwise there would be meaningful discussion about how much space he actually has left in the 15% bracket.

The bolded part seems pretty clear.

johnhenry

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Re: Self-employed: Are FICA taxes in addition to Tax Rates?
« Reply #13 on: April 16, 2015, 04:29:44 PM »
Quote
In other words, if I remain in the 15% tax bracket, is my income from self-employment about to be taxed at 30.3% (15.3% + 15%)? And if it bumps me into the 25% margin, a whopping 40.3%!?!??

Quote
That is.... a huge drag. It's tempting to throw my hands up with the idea when I learn that I'll only keep just over half to two-thirds of what I'll make. But sticking with my Forum Handle, looks like I'll just be taking this in stride.

Those statements make it sound (to me) like the OP is under the impression it's all or none.  Otherwise there would be meaningful discussion about how much space he actually has left in the 15% bracket.

The bolded part seems pretty clear.

And what about that bolded part?  Because the answer is no, it's not all 40.3%  It's only that % for the amount in that bracket. 

If the OP misunderstands how marginal tax brackets work he wouldn't be the first, even among the well-versed participants of this forum. :)

But if that concept is well understood, what's the point of making that part of the question?!  Instead of just asking about the payroll taxes? In fact the example he presents focuses more on the concept of "bumping" from one bracket to the next rather than whether payroll taxes were being paid twice.

I'll apologize for the tone of my original response.  It didn't warrant any exclamation marks!! But I'll stand by the need to clarify about the tax brackets because of the lack of clarity of the original and follow up posts.


beltim

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Re: Self-employed: Are FICA taxes in addition to Tax Rates?
« Reply #14 on: April 16, 2015, 04:45:50 PM »
Quote
In other words, if I remain in the 15% tax bracket, is my income from self-employment about to be taxed at 30.3% (15.3% + 15%)? And if it bumps me into the 25% margin, a whopping 40.3%!?!??

Quote
That is.... a huge drag. It's tempting to throw my hands up with the idea when I learn that I'll only keep just over half to two-thirds of what I'll make. But sticking with my Forum Handle, looks like I'll just be taking this in stride.

Those statements make it sound (to me) like the OP is under the impression it's all or none.  Otherwise there would be meaningful discussion about how much space he actually has left in the 15% bracket.

The bolded part seems pretty clear.

And what about that bolded part?  Because the answer is no, it's not all 40.3%  It's only that % for the amount in that bracket. 

If the OP misunderstands how marginal tax brackets work he wouldn't be the first, even among the well-versed participants of this forum. :)

But if that concept is well understood, what's the point of making that part of the question?!  Instead of just asking about the payroll taxes? In fact the example he presents focuses more on the concept of "bumping" from one bracket to the next rather than whether payroll taxes were being paid twice.

I'll apologize for the tone of my original response.  It didn't warrant any exclamation marks!! But I'll stand by the need to clarify about the tax brackets because of the lack of clarity of the original and follow up posts.

I read that as 40.3% taxation on income in the bracket! though admittedly only because of the sentence before.  I can definitely see how you read it the way you did.

I'd say the origin of the question is the surprise that tax rates can be so high at moderate incomes.  A 15% tax bracket doesn't seem so much, but when you do the math for self-employment rather than having the math done for you by payroll, then you realize the actual tax burden is much higher than you thought.

Cathy

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Re: Self-employed: Are FICA taxes in addition to Tax Rates?
« Reply #15 on: April 16, 2015, 07:53:08 PM »
...when you do the math for self-employment rather than having the math done for you by payroll, then you realize the actual tax burden is much higher than you thought.

Indeed. I chuckle a bit at all the threads where people claim that their taxes are so low in the US and post their supposed total effective rate, while ignoring FICA, including the employer contribution, and also ignoring other hidden payroll taxes such as unemployment insurance. The US system is very clever in hiding so many of the taxes that people pay.

By the way, to be ridiculously technical about it, self-employment income is not subject to FICA tax. The Federal Insurance Contributions Act ("FICA") is codified at chapter 21 of subtitle C ("employment taxes") of the Internal Revenue Code (26 USC 3101-3128) and it imposes two separate taxes: (1) an income tax on the wage income of employees (subchapter A of FICA), and (2) an excise tax imposed on employers for the privilege of being able to employ people, which just so happens to be equal to a percentage of the wages that the employer pays to his employees (subchapter B of FICA). Neither tax in FICA applies to self-employment.

However, chapter 2 of subtitle A ("income taxes") of the Internal Revenue Code, which is titled "Tax on Self-Employment Income" (26 USC 1401-1403), imposes a tax on self-employment income of individuals which just so happens to be the the same rate as the two taxes imposed under FICA combined, although it is not part of FICA. To provide relief from double taxation when the Social Security maximum would otherwise be exceeded, 26 USC 1402(b) provides that the self-employment income to which the Social Security portion of the tax applies is capped at the difference between the Social Security maximum and the amount of "wages" the individual earned during the year (i.e. outside of self-employment).

Aside from being located in difference places in the Internal Revenue Code, FICA and self-employment tax are different in a variety of subtle ways.
« Last Edit: April 16, 2015, 08:05:28 PM by Cathy »

beltim

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Re: Self-employed: Are FICA taxes in addition to Tax Rates?
« Reply #16 on: April 16, 2015, 09:17:21 PM »
...when you do the math for self-employment rather than having the math done for you by payroll, then you realize the actual tax burden is much higher than you thought.

Indeed. I chuckle a bit at all the threads where people claim that their taxes are so low in the US and post their supposed total effective rate, while ignoring FICA, including the employer contribution, and also ignoring other hidden payroll taxes such as unemployment insurance. The US system is very clever in hiding so many of the taxes that people pay.

Precisely.  I was going to post the self-employment income level that equaled, say, the average OECD tax burden, but didn't think anyone else would find it interesting. I do know a single self-employed person earning the median US household wage pays about 28% in federal taxes alone (including social security and Medicare), and can easily pay another couple percent each in state income tax, sales taxes, and property taxes if applicable. 

beltim

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Re: Self-employed: Are FICA taxes in addition to Tax Rates?
« Reply #17 on: April 16, 2015, 09:27:58 PM »
...when you do the math for self-employment rather than having the math done for you by payroll, then you realize the actual tax burden is much higher than you thought.

Indeed. I chuckle a bit at all the threads where people claim that their taxes are so low in the US and post their supposed total effective rate, while ignoring FICA, including the employer contribution, and also ignoring other hidden payroll taxes such as unemployment insurance. The US system is very clever in hiding so many of the taxes that people pay.

Precisely.  I was going to post the self-employment income level that equaled, say, the average OECD tax burden, but didn't think anyone else would find it interesting. I do know a single self-employed person earning the median US household wage pays about 28% in federal taxes alone (including social security and Medicare), and can easily pay another couple percent each in state income tax, sales taxes, and property taxes if applicable.

Oh, and that's actual tax rates.  The marginal tax rate on that person would be 40% plus state taxes.  I generally think taxes in the US are pretty low, but I don't think that person does.  In New York that marginal rate could hit 50%.

bacchi

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Re: Self-employed: Are FICA taxes in addition to Tax Rates?
« Reply #18 on: April 16, 2015, 09:45:36 PM »
Precisely.  I was going to post the self-employment income level that equaled, say, the average OECD tax burden, but didn't think anyone else would find it interesting. I do know a single self-employed person earning the median US household wage pays about 28% in federal taxes alone (including social security and Medicare), and can easily pay another couple percent each in state income tax, sales taxes, and property taxes if applicable.

I guess that median SE person has few deductions. On a low 6 figure income, I pay 22% all in (SE, income, property, and sales tax). I'll go with "that's pretty low" considering the benefits. :)

beltim

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Re: Self-employed: Are FICA taxes in addition to Tax Rates?
« Reply #19 on: April 16, 2015, 09:50:25 PM »
Precisely.  I was going to post the self-employment income level that equaled, say, the average OECD tax burden, but didn't think anyone else would find it interesting. I do know a single self-employed person earning the median US household wage pays about 28% in federal taxes alone (including social security and Medicare), and can easily pay another couple percent each in state income tax, sales taxes, and property taxes if applicable.

I guess that median SE person has few deductions. On a low 6 figure income, I pay 22% all in (SE, income, property, and sales tax). I'll go with "that's pretty low" considering the benefits. :)

Are you single? Do you have kids?  There's a reason I chose the example I did.  And, like I said, I generally think US taxes are pretty low.  But I don't in this case.

Cpa Cat

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Re: Self-employed: Are FICA taxes in addition to Tax Rates?
« Reply #20 on: April 16, 2015, 09:57:00 PM »
Let's be honest here... Self employed people have the advantage of deducting expenses that wage-earners don't. So while self-employment taxes can feel more shocking than FICA, the overall tax burden of your existence is the same, minus your taxable expenses.

And these expenses... many of them exist while you're a wage-earner. You just aren't compensated for them in any way.

That's not even touching that point where you can legitimately push your business into an S-Corp and start splitting your earnings between wages and distributions that aren't subject to self-employment taxes.

Oh yeah, and the awesome retirement plans available to self-employed individuals.

So while the state + federal tax burden on your taxable income is high - what are you -really- paying on the money that is going into your pocket?

The only time self-employed people really get F-ed is when they're being taxed on SE income from their Schedule C or Partnership, but the actual cash is being re-invested into capitalized expenses/property. That sucks.

Also when they don't understand their taxes. That kinda screws them too.

bacchi

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Re: Self-employed: Are FICA taxes in addition to Tax Rates?
« Reply #21 on: April 16, 2015, 10:18:17 PM »
Precisely.  I was going to post the self-employment income level that equaled, say, the average OECD tax burden, but didn't think anyone else would find it interesting. I do know a single self-employed person earning the median US household wage pays about 28% in federal taxes alone (including social security and Medicare), and can easily pay another couple percent each in state income tax, sales taxes, and property taxes if applicable.

I guess that median SE person has few deductions. On a low 6 figure income, I pay 22% all in (SE, income, property, and sales tax). I'll go with "that's pretty low" considering the benefits. :)

Are you single? Do you have kids?  There's a reason I chose the example I did.  And, like I said, I generally think US taxes are pretty low.  But I don't in this case.

I am single with no kids. However, I do use the generous provisions of the solo 401k.

beltim

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Re: Self-employed: Are FICA taxes in addition to Tax Rates?
« Reply #22 on: April 16, 2015, 10:28:44 PM »
Precisely.  I was going to post the self-employment income level that equaled, say, the average OECD tax burden, but didn't think anyone else would find it interesting. I do know a single self-employed person earning the median US household wage pays about 28% in federal taxes alone (including social security and Medicare), and can easily pay another couple percent each in state income tax, sales taxes, and property taxes if applicable.

I guess that median SE person has few deductions. On a low 6 figure income, I pay 22% all in (SE, income, property, and sales tax). I'll go with "that's pretty low" considering the benefits. :)

Are you single? Do you have kids?  There's a reason I chose the example I did.  And, like I said, I generally think US taxes are pretty low.  But I don't in this case.

I am single with no kids. However, I do use the generous provisions of the solo 401k.

Fair enough.  That's a nice $40k or more in deductions. 22% still seems low though.  I forget, do solo 401k contributions reduce your self employment tax?

bacchi

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Re: Self-employed: Are FICA taxes in addition to Tax Rates?
« Reply #23 on: April 16, 2015, 10:38:41 PM »
I am single with no kids. However, I do use the generous provisions of the solo 401k.

Fair enough.  That's a nice $40k or more in deductions. 22% still seems low though.  I forget, do solo 401k contributions reduce your self employment tax?

No, SE tax still applies.

It's not truly a fair accounting, now that I look back. I did do some W2 work last year, too, so the W2 employer paid FICA. That kicks it up to 25%. I also had some qualified dividends and capital gains. Your number might well be right.