Q. If I start a sideline self-employed business, do I still have to pay personal payroll tax if I’m over the Social Security tax wage ceiling in 2012? D.D., Cedar Grove, N.J.
A. Yes. For a self-employed business, you must pay self-employment tax, which is the equivalent of the Social Security and Medicare taxes paid by employers and employees. The self-employment tax rate on self-employment income above the Social Security tax ceiling ($110,100 for 2012) is 2.9%, double the Medicare tax rate that is withheld from. Thus, you must pay the 2.9% tax on your self-employment earnings even though the wages from your regular job exceed the Social Security tax ceiling. You don’t have to pay any Social Security tax on your self-employment income.
Tip: Half of the self-employment tax you pay is deductible “above the line” on your Form 1040.