Re self-employment tax for novices:
Below are the additional comments I said I'd post. I hope they help
some newly-self-employed people out there to understand the HOW and
WHY of their tax situation. Without the HOW and WHY, the IRS's 56
trillion lines of dense fine print are only 56 trillion trees with
First, the ?self-employment tax? is actually NOT the general
federal income tax (as its misleading name falsely indicates), but
rather is ONLY the self-employed person?s FICA [social security]
contribution (something its misleading name does NOT communicate).
Second, it is 14.13% of his/her gross income (that is, 15.3% of
92.35%). In other words, for quarterly estimated payments, a
self-employed person must set aside 14.13% of his/her gross income as
their social security contribution BEFORE THEY HAVE TOUCHED the
6-15%-ish general federal income tax that they owe on 92.35% of their
gross income. That simple fact is not clearly explained ANYWHERE that
I ever found by looking at (a) the instruction book for Form 1040, (b)
the instructions on schedule SE, (c) the instruction sheets for Form
1040-ES, or (d) any help page on the irs.gov website.
THEREFORE, a warning to newly-self-employed people who are trying
to figure out what percentage of their gross receipts to mail to the
IRS as quarterly estimated payments using Form 1040-ES: If the
percentage that you computed is less than 22%, you probably are
Below is a "Wait,-back-the-truck-up-and-re-explain-that-but-start-from-the-beginning"
An amount equal to 15.3% of every worker's income goes to his/her
FICA contribution (which pays for Social Security [12.4%] and Medicare
[2.9%]). HOWEVER, people who are employees only contribute half that
(7.65%) through their payroll deduction. The other half (7.65%) is
paid by their employer and is NOT classified as the employee's income.
MEANWHILE, because self-employed workers don't have employers, they
must contribute the whole 15.3% themselves. This is the (only) purpose
of the "self-employment tax" that you compute on schedule SE (even
though, stupidly, it doesn't TELL you anywhere on Form 1040 or on
schedule SE that this tax is for FICA and not for general income tax).
NOW, it would be unfair to slap general income tax on the second
half of that money, because employees don't get taxed on their
employers' contribution of the second half. That's WHY you deduct half
of your "self-employment tax" from your general-income-tax liability.
(The IRS is good at telling you "subtract x from y," but it is rather
poor at explaining WHY you do that.)
I benefited from reading the Social Security Administration?s FAQ
(?I am self-employed. How do I pay Social Security tax??). I don't see
why the IRS couldn?t explain things that clearly to users of Form 1040
and Form 1040-ES.
As I said at top, I hope that these comments help some
newly-self-employed people out there who, like me, have suffered from
the IRS's lack of competent technical writers.