Self employment income; do you begin with Net C - 1/2 SE tax or (Net C

[R. Butler]

We have a profit sharing plan for a sole proprietership. It has always been my understanding that to begin the calculation I start with Net C and then subtract 1/2 SE tax. I have come across a position stating that you should actually take (Net C *.9235) and then subtract 1/2 SE tax. Is this alternative view correct?

[Appleby]

Contributions for Self employed individuals are based on their Net Adjusted Business Income.

This page ,from IRS publication 560, helps to explains how to figure the deduction

http://www.irs.gov/forms_pubs/pubs/p56005.htm

Alos, see "Deduction Limit for Self-Employed Individuals" on the following page

http://www.irs.gov/forms_pubs/pubs/p56004.htm

I hope it helps.

[Guest]

the typical calc I learned would be:

start with

1. Sched C

2. subtract contributions to rank and file

3. multiply by .9235

4. calculate FICA

5. subtract FICA from value in step 2

6. split step between contribution and compensation.

[Guest RJM]

Tom:

In Step 5, don't you subtract 1/2 of FICA from value in Step 2?

[Guest]

yes, that is what I meant.

[Guest Rudy]

As the social security tax rate is 6.2% each for employers and employees, wouldn't the multiplier be .938 (1-.062) instead of .9235 (1-.0765(old rate)).

[Guest JAREL]

The FICA tax rate is the same for employees (6.2% OASDI plus 1.45% Medicare), thus the .9235 multiple. The gross amount is multiplied by this factor to simplify a calculation that will avoid the self employed person from having to pay FICA tax on FICA tax (since in a corporation, the employer pays half and the employee pays half. Mathematically it's not perfect, but that's what the IRS says to do.