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Self-Employment Taxes Increase Again
by Julian Block
has been an increase for 2005 in the maximum amount of wages subject to
FICA (short for Federal Insurance Contribution Act) taxes, better known
as Social Security taxes. About 9.9 million workers will be hit with a
higher tab of as much as $130.20 because of an increase in the wage base
for the 6.20 percent rate for the Social Security benefits tax. The base
went from $87,900 for 2004 to $90,000 for 2005.
Self-employment taxes (Social
Security taxes for the self-employed) also are going to be higher for
many freelance writers and other individuals who operate their
businesses or professions as sole proprietorships, in partnerships
with others or as independent contractors.
No change in the tax rate of
15.30 percent on net self-employment earnings (receipts minus
expenses). But, as is true of FICA taxes, the 15.30 percent tax
consists of two components with different rates. The first one is
12.40 percent for the Social Security benefits portion, the old age,
survivors, and disability insurance fund, with the earnings base going
from $87,900 to $90,000. The second one is 2.90 percent for the
Medicare fund, the federal hospital insurance program for the elderly,
with no earnings ceiling.
For someone whose
earnings during 2005 exceed $90,000, the self-employment tax increases
by at least $260.40 (the excess of $90,000 over $87,900 multiplied by
15.30 percent). A self-employed surrenders $29 to Medicare taxes for
each $1,000 of earnings above $90,000. When tax time rolls around, do
the paperwork for the self-employment tax on Schedule SE, which
accompanies Form 1040.
Some Strategies to Trim the Tab
Long-standing IRS regulations allow an
individual with more than one self-employed operation to combine the
earnings from all of them, so as to offset the losses from one or more
businesses against the earnings from those that are profitable.
Or suppose a
husband and wife own a business as a partnership and both pay
self-employment taxes. They should consider conversion of their
business to a sole proprietorship. Elimination of one spouse's
earnings means that only one of them remains liable for
To somewhat ease
the hurt, self-employeds are able to recoup some of their taxes. They
get to deduct one-half of the self-employment tax on their 1040 forms.
The IRS characterizes this
kind of write-off as an "above-the-line" adjustment, meaning it gets
subtracted from gross income to arrive at adjusted gross income at the
bottom of page 1 of Form 1040, just the same as alimony payments and
contributions to traditional IRAs and other retirement plans.
Consequently, the write-off is allowable whether a person itemizes
deductions for donations to charities and the like or uses the
standard deduction, the no-questions-asked amount that is
automatically available without the need to itemize.
The IRS has the support of the courts in the agency's
crackdown on individuals who claim that they are excused from
liability for FICA or self-employment taxes because, in their view,
the Social Security system is unconstitutional.
For example, Bruce
Hunsberger, a service-station operator in Indiana, got exactly nowhere
with his argument that he was the victim of an unconstitutional,
government-sponsored scam because Uncle Sam is unlikely "to have
enough money to pay his benefits when they become due, especially
since the laws are constantly changed." The Tax Court cited Bruce's
responsibility to keep kicking in for self-employment taxes even if he
ultimately kicks off without collecting any benefits, noting that the
system "does not provide the contractual rights normally thought to
characterize an insurance program."
This was made
expensively clear to George Lee Kindred, the recipient of fees for a
series of speeches in which he urged his audiences to revolt against
the income-tax system. He, too, has to pay self-employment taxes,
ruled the Court of Appeals for the Sixth Circuit.
Block is a syndicated columnist, attorney and former IRS investigator who has
been cited by the New York Times as "a leading tax professional" and by the
Wall Street Journal as an "accomplished writer on taxes." His "Tax Tips For
Freelance Writers, Photographers And Artists" shows how to save truly big
money on taxes—legally—and explains the steps you should take to reduce taxes
for this year and even gain a head start for future years. Send $9.95 for an
e-mailed copy or $14.95 (in the U.S.) for a postpaid copy to:
Washington Square, #1-G
Larchmont, NY 10538-2032.
Contact him at
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