Which of the following is correct regarding self-employment taxes? I. For the pu

Question

Which of the following is correct regarding self-employment taxes?

I. For the purposes of the portion of self-employment tax that is equivalent to Social Security tax, taxable self-employment income is limited to a prescribed maximum amount reduced by other wages earned by the taxpayer that are subject to FICA and Medicare taxes.

II. For purposes of the portion of self-employment tax that is equivalent to the Medicare tax, taxable self-employment income is limited to a prescribed maximum amount reduced by other wages earned by the taxpayer that are subject to FICA and Medicare taxes.

Explanation / Answer

The Social Security Administration calls the part of wages subject to the Social Security tax the contribution and benefit base. However, for purposes of the self-employment tax, I make the distinction between the contribution and benefit base, which I simply call the SS wage base, and the self-employment tax wage base. The SET wage base is about 8% ( 1/.9235 – 1) higher than the SS wage base, because the limit to the SS wage base only applies aftersubtracting the 7.65% employer contribution, meaning that the self-employed only pay the maximum Social Security tax when they earn at least the SE wage base, which, for 2017, is $137,737, while the SS wage base, which is the maximum wage earned by an employee that would result in the maximum SS tax, is $127,200.

In 2013, a new Additional Medicare Tax of 0.9% was added to those taxpayers with incomes above the following threshold amounts:

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