As has already been explained to you, the SS tax is the same for regular wage earners and the self-employed. It’s just that when you’re someone else’s employee, the employer contributes half of your amount before you ever see it. You’re still paying both halves effectively.
Let’s look at the alternatives.
Your son took home $7,000 and owes $1,100 in social insurance taxes.
Had he worked for a company, he would owe $550, and the employer would owe $550. Do you think the employer would have still given him a (pre-tax) check for $7,000? It isn’t plausible at all to think that. It is far more likely that the employer would look at its employment costs and hired him at a pay rate that would have provided a check for $6,450, and then your son would owe $550 out of that.
Ain’t no such thing as a free lunch.
Yes, but even if your declared income drops to zero as a result, you still pay SSI, Medicare, Medicaid on the gross amount. The deductions you refer to only help to reduce income for income tax purposes (and of course, they only count as far as they reduce tax liability, so any expenses that drop your income below the standard deduction for your filing status are unusable–and can’t be carried forward).
If you take in $20,000 in gross receipts as an independent contractor, but your expenses are $10,000, you’ll pay federal and state income tax on only $10,000 but full double SSI on the entire $20,000. That’s so patently unfair that I can’t believe there are so many people defending the government’s practices in doing so. Only the net constitutes actual earnings, so only the net should be taxed at all.
Actually, it’s quite plausible to think that. Especially since that $7000 constituted less than minimum wage for the amount of hours he worked. That’s another benefit to the employer from styling its employees as “independent contractors”–the ability to ignore/flout labor laws.
This is incorrect.
Self-employment tax is calculated on net income, not gross.
See: How To Reduce Your Self-Employment Tax
As beowulf notes, that is incorrect.
Look at a Schedule C.
Now look at a Schedule SE.
Schedule C (Profit or Loss from Business) is the one where you tally up receipts, subtract expenses and other deductions, and come line 31, you get Net Profit.
Schedule SE (Self-employment Tax) is the one where you figure out the self-employment tax. Look at line 2. That’s where you enter your net profit from line 31 of Schedule C. You are taxed on that amount (well, on 92.35% of that amount) , not your gross receipts, gross profit, gross income, or gross anything else.
I’m self-employed, and I employ my spouse. And I’m a CPA. So I know everything that you’re complaining about, and I hear it 200 times a year from clients who are self-employed.
After much analysis of the taxes and the ways to avoid SE tax, I have to tell you that yes, it’s fair. If anything less was paid by sole proprietors, I’d be touting it as a tax loophole.
One problem here is that you’re not comparing apples and oranges. What you’re doing is like complaining that $1 (USD) is not the same as $1 (CAD). They’re not the same, and shouldn’t be compared as if they were. $7,000 of self-employment income is not the same as $7,000 of wages. $7,000 of wages is equal to $7,506.70 of self-employment income. $7,000 of wages is equal to $6,527.50 of wages.
Wait until he is not working, and he has to pay in the estimated quarterly tax to the IRS, because he usually is working. You pay the estimated tax owed 3 months in advance of earning it. He’ll be shitting bullets.
The first estimated tax payment is on April 15. Then June 15, Sept 15, and Jan 15 of the following year. (Except where the 15 falls on a weekend or holiday.)
No, not in the United States you don’t.
Look, people just don’t understand how estimated taxes work. No, you don’t pay 3 months in advance and if you aren’t earning any income this year, you don’t have to pay estimated taxes regardless of how much you earned last year. You have many options on how to calculate it: Use last year’s taxes, use this year’s taxes, use last quarter’s annualized income.
It’s a long subject and I don’t have the energy to describe it from scratch. If you want to educate yourself, read this: Fairmark Guide to Estimated Taxes.
He could incorporate. Then he could pay himself a minimal salary (on which he would owe both employer and employee side employment taxes), deduct expenses, and pay himself in dividends, bypassing self employment tax.
Exactly. The easiest way to do it is just to base your estimated taxes on last year’s income. No headaches, no fussing trying to figure out your numbers, etc. It’s great if you expect to make more this year, but is not the most financially prudent way to do it if you expect to make less this year (unless you’re one of those people who likes to overpay taxes as a sort-of forced savings program and then get surprised with a big refund check.)
But if you’re making no money this year, you’re not going to be paying taxes on last year’s income, unless you really want to. You can just pay what you actually owe.
I’ll have to let my brothers know they need to talk to their accountant about this.
Keep in mind that dividend payments are not a deductible expense for corporations. That is why many complain about what they call the double taxation of dividends.
And you can also get in trouble for not paying yourself a reasonable salary. Of course, “reasonable” is subject to interpretation.
Same scenario, the corp would be paying the other half and the corp takes all the deductions not you. You just become a guy with a paycheck.
The same amount of money goes out, just now half comes from your paycheck and the other half comes from the company coffer. You do not save anything.
I think what Harmonious Discord is talking about is this situation
1 I made $7000 last year
2 I expect to make $7000 again this year
3 I’m supposed to pay my estimated taxes in quarterly installments
4 My income is seasonal ( I sell Christmas trees on a street corner in Manhattan), so some of the quarterly payments come due before I’ve earned any income in that year. But I will earn enough income for taxes to be due- it’s just all in the latter part of the year.
That’s what I’m talking about.
Ah, I missed the seasonal aspect of this.
Yes, the payments are usually equal and have to total 90% of the total tax liability to avoid a penalty. So basically you have to pay at least 22.5% of your annual tax liability to be in the clear. I think there may be exceptions for unexpected earnings, but I am not an accountant.
Then you can use the Annualized Installment (AI) method to calculate your quarterly payments.
The AI method lets you calculate the actual income you earned in each quarter as well as the actual deductible expenses each quarter and base your payments on that. If you really had a situation where you had absolutely $0 taxable income every month except December, your quarterly payments for the first three quarters would be $0 and it would all be due with your last quarterly payment.
You would have to file Form 2210 with your tax return to show you were electing this method and to show your calculations.
Please read Publication 505 if you want to learn more.
You only have to pay 90% if you choose to use the current year’s taxes method. You can also pay 100% (or 110% for some high income earners) of your previous year’s taxes in four equal installments, completely disregarding this year’s taxes, or you can choose to calculate your actual annualized taxes every quarter and make unequal payments based on that.