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How to avoid self-employment tax

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in Small Business Tax

Q: I am single and earned $79,040 from my regular job in 2003. But I also had $15,233 in self-employment (SE) income. The IRS says I have to pay the full self-employment tax on the additional earnings. Is this true? D.A., Needham, Mass.

A: Not exactly. Here's how to do the math: The combined 15.3 percent self-employment tax rate for Social Security and Medicare taxes applies to a person's first $87,000 of self-employment income for 2003. The 2.9 Medicare tax portion of the SE tax applies to all self-employment income. (There's no ceiling.) However, if you earn a salary, you receive credit for Social Security and Medicare taxes withheld from your wages and paid by your employer.

Therefore, when you combine your regular wages with net self-employment earnings, the 15.3 percent SE tax only applies to the first $7,960 of your self-employment earnings ($87,000 minus $79,040). That equals a tax of $1,218. The tax rate on the remaining $7,273 of your self-employment earnings ($15,233 minus $7,960) is 2.9 percent, which equals $211.

Bottom line: Your SE tax bill, therefore, amounts to $1,429 ($1,218 + $211).

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