In a prior blog I talked about Social Security tax for self employed individuals being reduced from the 12.4% to 10.4% in 2011. What I didn’t talk about was how that effects the 50% of self employed income tax deduction self employed individuals receive on their income tax returns. Let’s talk about that now.
Self employed individuals are taxed 12.4% tax for Social Security and 2.9% for Medicare on their self employed earnings up to $106,800. But they are able to take 50% of this tax and reduce their adjusted gross earnings, thereby reducing the amount they have to pay in Federal Income tax. In 2011 the Social Security tax was reduced to 10.4%. The 10.4% is actually made up of 2 parts. The first part is the 1/2 they would pay if they were an employee and that is the 1/2 of Social Security tax that was reduced the 2%. The other 1/2 they pay is the employer portion of Social Security tax that amount was not reduced. Therefore to only receive a 50% deduction on the total amount of tax paid would be unfair. So to make up for this mathematical discrepancy the income tax deduction in 2011 will be 59.6% of the Social Security portion of the Self Employed Income Tax and 50% of the Medicare portion.
Thank goodness for software so I don’t have to calculate this odd little formula each time a self employed tax return crosses my desk!