(3)Step 3: Social Security tax. The Social Security tax component of the self-employment tax equals 12.4% (the combined Social Security tax rate for employer and employee (6.2% + 6.2% = 12.4%)) multiplied by the lesser of: (i)the taxpayer’s net earnings from self-employment (from step 2) or (ii)$128,400 (the maximum tax base for the Social Security tax). (4)Step 4: Medicare tax. The Medicare tax component of the self-employment tax equals 2.9% (the combined Medicare tax rate for employer and employee (1.45% + 1.45% = 2.9%) multiplied by the net earnings from self-employment (from Step 2). (5)Step 5: additional Medicare tax. Although applied to self-employment earnings, the additional Medicare tax is not considered technically a part of the self-employment tax. The additional Medicare tax due on net self-employment earnings equals .9 percent multiplied by the greater of: (i)zero or (ii)net earnings from self-employment (from step 2) less $200,000 ($125,000 for married filing separate; $250,000 for married filing joint). The additional Medicare tax is considered an “employee” tax (and not a “self-employment” tax). ii)When a taxpayer receives both employee compensation and self-employment earnings, the calculation of the taxpayer’s FICA taxes on self-employment earnings in these settings can be determined as follows: Social Security Tax:
7 (1)Step 1: Determine the limit on the Social Security portion of the self-employment tax base by subtracting the employee compensation from the Social Security wage base ($128,400 in 2018) (not below $0). (2)Step 2: Determine the net earnings from self-employment (self-employment earnings times 92.35 percent). (3)Step 3: Multiply the lesser of Steps (1) and (2) by 12.4 percent. This is the amount of Social Security taxes due on the self-employment income. Medicare Tax: (4)Step 4: Multiply the amount from Step (2) by 2.9 percent, the combined Medicare tax rate for employer and employee. Additional Medicare Tax: (5)Step 5: Add the amount from Step (2) and the taxpayer’s compensation. If married filing jointly, also add the spouse’s compensation and net earnings from self-employment (spouse’s self-employment earnings times 92.35 percent). (6)Step 6: Multiply the greater of [(a) zero or (b) the amount from Step (5) minus $200,000 ($125,000 for married filing separately; $250,000 for married filing jointly)] by .9 percent. (7)Step 7: Take the amount from Step 6 and subtract the amount of the additional Medicare tax withheld by the taxpayer’s employer (and his or her spouse’s employer if married filing jointly). This is the additional Medicare tax due on the self-employment income. d)Employee vs. self-employed (independent contractor) e)Employee vs. independent contractor comparison i)The two primary tax differences between independent contractors and employees relate to (1)The amount of their FICA taxes payable and (2)The deductibility of their business expenses. 4)Tax Credits a)Nonrefundable personal credits i)Child tax credit (1)$2,000 credit for each qualifying child under age 17 (2)$500 credit for other qualifying dependents (3)Credit is partially refundable.