Self Employment Calculation for 2011

[TPApril]

Generally when calculating eligible income for Self Employed, 1/2 of the social security tax and 1/2 of the medicare tax are subtracted - which would normally be 6.2% (up to TWB) and 1.45%.

2011 had a 2.0% tax cut for EE's, so the Self Employed ended up paying 6.2+4.2=10.4%. Would we then take half of that, or 5.2% for calculating eligible earnings?

[Mike Preston]

The way the calculation works out is that you do the same thing as you would the prior year. Really, they thought of everything. OK, rounding might make it $1 off or two, but the bottom line is that if you have an "old" spreadsheet that hasn't been updated to reflect the new percentages, use it just as you would have before the change and the result will be correct.

Maybe somebody else can run down the citations for you.

[movedon]

If you look at the instructions for the SE for 2011, you'll see that the deduction is still 7.65%

[ETA Consulting LLC]

2011 had a 2.0% tax cut for EE's, so the Self Employed ended up paying 6.2+4.2=10.4%. Would we then take half of that, or 5.2% for calculating eligible earnings?

You forgot about the additional 2.90%; which is 1.45 multiplied by 2. So, your 15.3% is reduced to 13.3%; not 10.4%. Remember, you're only applying the "earnings" calculation to "92.35%" of salary.

So, if an owner makes $100K, you'll calculate 13.2% of 92,350. This will be your self employment tax. 1/2 of that will be your reduction (which will be reduced from the $100,000).

Good Luck!

[Mike Preston]

ERISAToolkit,

What about the 59.6% multiplier on the amount exclusive of the Medicare component?

Have you run the numbers? Do they really work out for you as you describe?

My spreadsheet shows that if the amount before reduction is $100,000, the deduction is $7,063.30, resulting in $92,936.70

If I ran that same calculation through 2010, the result is $92,935.23.

As I said, a buck or two off.

But your response was off the mark. Unless I misunderstood what you wrote.

mike

[ETA Consulting LLC]

ERISAToolkit,

Have you run the numbers? Do they really work out for you as you describe?

mike

Sure. The're on the Form 1040 Schedule SE. I may have mis-read the original question as to what amounts are being divided by two. I see your point, instead of dividing by 2, you're actually multiplying by .5751. Step 6 on Schedule SE.

Good Luck!

[Mike Preston]

So, you didn't get the memo (read the law) where it bifurcated the calculation such that the Schedule SE deduction is no longer the appropriate measure to use as a reduction to SE Income for pension purposes, huh?

Check Sal's stuff.

[movedon]

So, you didn't get the memo (read the law) where it bifurcated the calculation such that the Schedule SE deduction is no longer the appropriate measure to use as a reduction to SE Income for pension purposes, huh?

Check Sal's stuff.

Hey, Mike. I don't understand this comment re "bifurcation." The SE deduction for 2011 is not half of the reduced SE tax - it's still 7.65%, which is also still the correct amount to reduce earned income for the pension calc. In any event, Mike's calc is correct - within a buck or two.

[masteff]

Technically, the deduction is the ER portion of the SE tax. That's why it's still effectively the same %. In fact the 2011 Form SE basically says as much: Line 6 - Deduction for employer-equivalent portion of self-employment tax.

Multiplying the SE tax by .5751 is mathematically the same as multiplying SE income by 7.65%

7.65% / 13.3% = .5751

IMO, Line 6 is a very backwards method to calc the SE deduction. Line 6 should have simply been a repeat of line 5 but using the ER-only percentages.

Edit: after looking at 164(f) I realize I should say "Philosophically" instead of "Technically".

[ETA Consulting LLC]

Technically, the deduction is the ER portion of the SE tax. That's why it's still effectively the same %. In fact the 2011 Form SE basically says as much: Line 6 - Deduction for employer-equivalent portion of self-employment tax.

Multiplying the SE tax by .5751 is mathematically the same as multiplying SE income by 7.65%

7.65% / 13.3% = .5751

IMO, Line 6 is a very backwards method to calc the SE deduction. Line 6 should have simply been a repeat of line 5 but using the ER-only percentages.

I'm pushing the "like" button right now.

[PensionPro]

Q-8: Will the 2011 change affect earned income?

Yes, but only insignificantly. For 2011 only, the 164(f) deduction will be based on 59.6% of the Old Age portion of SE Tax. The deduction applicable to the Medicare portion of SE Tax will remain at 50%. The reason for this adjustment is that the 164(f) deduction is designed to mimic the employer’s share of FICA, which does not change for 2011.

For example, suppose a self-employed individual has NESE of $155,000 and no SEHI or wages. In 2010, the individual’s SE Tax will be $17,394 and 164(f) deduction will be $8,697. In 2011, the individual’s SE Tax will be $15,258, thanks to the change of rates, but the 164(f) deduction will be $8,695. Thus, the 164(f) deduction is only $2 less than it would have been in the absence of the rate change, even though the individual is saving over $2,100 in SE Tax.

http://www.relius.net/News/TechnicalUpdates.aspx?ID=557

[Mike Preston]

The point is that the 2011 Schedule SE has been changed and the reduction for pension purposes (again) shows up on the form. But the 2010 Schedule SE didn't show that number anywhere. If you went by the 2010 Schedule SE for your calculation you are incorrect.

I'm happy to see they changed the 2011 form so that it again shows the pension reduction.

I like relying on my spreadsheets, though.

[ETA Consulting LLC]

The point is that the 2011 Schedule SE has been changed and the reduction for pension purposes (again) shows up on the form. But the 2010 Schedule SE didn't show that number anywhere. If you went by the 2010 Schedule SE for your calculation you are incorrect.

I'm happy to see they changed the 2011 form so that it again shows the pension reduction.

I like relying on my spreadsheets, though.

You're correct. It's more effective to create a spreadsheet as soon as the rules are changed. When you wait on the IRS to create the new form, there's always a delay.

[Belgarath]

While I know rounding may make different spreadsheets off by a buck or two, my spreadsheet comes up with 255,035 as the "magic number" on line 31, Schedule C, to get the sole prop to the $245,000 comp limit after the reduction for the S/E tax. Is that what y'all get (approximately?)

[Mike Preston]

Precisely.

$255,036.73 for 2010 to get $245,000.

$255,035.00 for 2011 to get $245,000.

$260,310.19 for 2012 to get to $250,000

I'm still using the .596 multiplier method rather than the .5715 method because it tracks the law rather than an algebraic manipulation of the law. I'm still a few months away (g) from needing the 2012 calculation to be correct.

Is it?