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Q: Self-employment Tax and Personal Tax ( No Answer,   4 Comments )
Subject: Self-employment Tax and Personal Tax
Category: Miscellaneous
Asked by: robaina-ga
List Price: $3.00
Posted: 11 Mar 2005 22:51 PST
Expires: 27 Mar 2005 12:01 PST
Question ID: 493077
My income for 2004 was exclusively through Form 1099-MISC -what is
described as "Self Employment".

My question is if I have to pay Self Employment Tax AND conventional
income tax through form 1040?

Clarification of Question by robaina-ga on 27 Mar 2005 12:00 PST
Thank you very much for all your comments.
They were very helpful indeed!
There is no answer at this time.

Subject: Re: Self-employment Tax and Personal Tax
From: indexturret-ga on 20 Mar 2005 20:25 PST
  I share the characteristic of all income being self-employment
income as shown on Form 1099-MISC. Our tax situations could be very
different outside of that, but the basic answer to your question is
  I would like to point something out that you may or may not know
regarding this issue. I didn't know it until recently. The
"self-employment tax" that you calculate on schedule SE is nothing
other than your FICA contribution (FICA = Social Security + Medicare).
It does not include any money toward the general income tax. I feel
that this tax is misnamed. If they had called it "self-employment FICA
contribution" (which is what it really is) I would not have been so
confused. Anyway, I eventually figured it out, but what a frustrating
journey it was.
  I have a bit more to say on this, but I need to get to bed right
now. I will add another comment tomorrow. Hope my comments are of some
help. Thanks.
Subject: Re: Self-employment Tax and Personal Tax
From: kriswrite-ga on 21 Mar 2005 08:03 PST
Yes. It may feel like a penalty for being self employed, but when you
get down to it, you are paying not only what you normally would
(personal tax, as you call it), but also what your employer would
normally pay for you.

Subject: Re: Self-employment Tax and Personal Tax
From: indexturret-ga on 21 Mar 2005 14:42 PST
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
zero forest.

   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 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.

Subject: Re: Self-employment Tax and Personal Tax
From: 94nole-ga on 26 Mar 2005 18:36 PST
The SE tax is not as punitive as people think it is.  It SEEMS
punitive because people spend the year collecting cash year as an
independent contractor or some other non-employee arrangement and pay
no tax whatsoever.  This wouldn't happen if they were not

The additional amount you pay is equal to 7.65% of 92.35% of your net
self-employment income.

Even employees pay the other 7.65% (look in boxes 4 & 6 on your W-2)
of their salary or wages (FICA is limited to about $90K of salary).

If you are an employee, your employer pays that other half of the SE
tax while you pay half through withholdings.

Then when you file your return you are not only faced with regular
income tax but also responsible for the 15.3% of SE tax.  It's painful
that's why there is the 1040-ES, Estimated tax payments that should be
a pay as you go plan.

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