Paying Social Security And Medicare Taxes
The Social Security tax rate for 2003 is 15.3 percent (the same as 2002) on self-employment income up to $87,000. If your net earnings exceed $87,000, you continue to pay only the Medicare portion of the Social Security tax, which is 2.9 percent, on the rest of your earnings. There are two income tax deductions that reduce your tax liability. The deductions are intended to make sure self-employed people are treated in much the same way as employers and employees for Social Security and income tax purposes.
First, your net earnings from self-employment are reduced by an amount equal to half of your total Social Security tax. This is similar to the way employees are treated under the tax laws because the employer's share of the Social Security tax is not considered income to the employee.
Second, you can deduct half of your Social Security tax on the face of the IRS Form 1040. This means the deduction is taken from your gross income in determining adjusted gross income. It cannot be an itemized deduction and must not be listed on your Schedule C.
If you have wages as well as self-employment earnings, the tax on your wages is paid first. But this rule is important only if your total earnings are more than $87,000. For example, if you have $20,000 in wages and $30,000 in self-employment income in 2003, you pay the appropriate Social Security taxes on both your wages and business earnings. However, in 2003 if your wages are $70,000 and you have $20,000 in net earnings from a business, you do not pay dual Social Security taxes on earnings above $87,000. Your employer will withhold 7.65 percent in Social Security and Medicare taxes on your $70,000 in earnings. You must pay 15.3 percent in Social Security and Medicare taxes on your first $17,000 in self-employment earnings and 2.9 percent in Medicare tax on the remaining $3,000 in earnings.
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