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Hey Peter,

Your post is a real eye opener regarding SE taxes. I just looked at the IRS website http://www.irs.gov/businesses/small/article/0,,id=98846,00.h... and read the following:

Self-Employment Tax Rate

The 2010 Tax Relief Act reduced the self-employment tax by 2% for self-employment income earned in calendar year 2011. The self-employment tax rate for self-employment income earned in calendar year 2011 is 13.3% (10.4% for Social Security and 2.9% for Medicare). For self-employment income earned in 2010, the self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).

For both 2010 and 2011, the first $106,800 of your combined wages, tips, and net earnings are subject to any combination of the Social Security part of self-employment tax, Social Security tax, or railroad retirement (tier 1) tax. Income you make after $106,800 will not be subject to the Social Security tax.

All your combined wages, tips, and net earnings in the current year are subject to any combination of the 2.9% Medicare part of Self-Employment tax, Social Security tax, or railroad retirement (tier 1) tax.

If your wages and tips are subject to either Social Security or railroad retirement (tier 1) tax, or both, and total at least $106,800, do not pay the Social Security part of the self-employment tax on any of your net earnings. However, you must pay the 2.9% Medicare part of the self-employment tax on all your net earnings.

If you use a tax year other than the calendar year, you must use the tax rate and maximum earnings limit in effect at the beginning of your tax year. Even if the tax rate or maximum earnings limit changes during your tax year, continue to use the same rate and limit throughout your tax year.


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If you look at my bolded part its obvious that $106,800 cap is not fair, favors the wealthy and should be eliminated. I suspect if that were to happen that the total SE tax rate % would be significantly reduced for everyone.

This may seem simplistic, but I believe it would result in a fairer SE tax system. Of course this does not address the wealthy individuals who derive their income solely from capital gains and dividend income.

Any comments?

Rich
Arizona
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