Message Font: Serif | Sans-Serif
 
No. of Recommendations: 0
Kathleen
I agree with Bill. The reason to reduce ones SE income by 7.65% is so the worker is not paying SE tax on SE tax. IOW, you take the SE tax out first and then calculate the SE tax on what remains of the earned income.

Interestingly, the employee's portion of the SE tax may not be 7.65%. If the SE income exceeds the maximum subject to the 12.4% SS tax ($128,400 for 2018), then the SE tax rate declines as the SE income increases above this level. But the Schedule SE does not adjust for this, at least that I can see. The entire SE income....even if it were $1MM, is multiplied by .9235 on line 4 of Schedule SE before then separating the SS tax from the Medicare tax for high incomes.

Another sort of interesting finding on this....the current 15.3% rate began in 1990. For 1989 and 1988 it was 13.02%. But the Schedule SE for these years did not first multiply the earned income by .9349 (1-(.1302/2)) before calculating the SE tax. Go figure.

BruceM
Print the post  

Announcements

Disclaimer:
In accordance with IRS Circular 230, you cannot use the contents of any post on The Motley Fool's message boards to avoid tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.