Social security and medicare taxes for small business owners

[esantoro]

I just got my yearly notice/balance/statement sheet, whatever you call it ,from the social security office.

When you work for an employer, you pay 6.2% of your salary to Social Security. Your employer matches that. You also pay 1.45% in Medicare taxes. Your employer matches that too.

NOWWWWWWWWWW....When you are in business for yourself, you must pay both the full 12.4% of SS taxes and the full 2.9% of medicare taxes. Combined you are paying 15.3 percent of your income for these taxes.

I believe that you must pay these percentages for income (once all your deductions have been subtracted) of $400 and above.

My question is this.

When you figure how much federal income tax you owe, do you first deduct from your taxable income what you pay for the above taxes (my understanding is that you deduct the above taxes from taxable income), or are you in effect taxed twice?

Thanks for any input.

Ed

[esantoro]

Here's what I have found out.

These two taxes together are known as self-employment taxes(SECA).

You can deduct only half of what you end up paying in SECA from your gross income for federal tax purposes.

http://www.irs.gov/businesses/small/articl...d=98846,00.html

Even on the small business level, you can begin to see how the tax structures are weighted in favor of corporations and individuals with incomes over $102,000 . And you can begin to see how much the wealthy have to lose with more progressive tax reforms. You can also begin to see how the current tax structure is set up to remove tax revenue from the system and place a proportionately greater tax responsibility on those with lower incomes, those, it is assumed, who would be the most inclined to benefit from services paid for with taxes. This might work out ok if those same tax revenues were not actually going to benefit those individuals who already benefit from the tax structure due to their higher incomes.

My understanding of this system is simplified in this way. Please correct me if I'm wrong.

Let's say that there is a total of $100 out there in the economy. If everyone is taxed at a flat rate of 25 percent, tax revenues would be $25. Perhaps this number could go down to 17 or 18 percent.

We don't have such a system. Our system is something like this, with perhaps a bit of exaggeration for effect, but only a bit. In our system, 90 percent of the people make $10 of the available $100 in the economy. Let's say they are taxed at 25 percent. Their tax contribution is $2.50. The wealthy make the remaining $90 of the available $100. Their tax contribution is $13.50. Total tax revenues to run what needs to be run is $16. In my simplified example, we have a tax system that is funded only 64 percent of what it should be. This is a failing mark, and I bet that a more accurate accounting would reveal a funding of less than 50 percent.

If the wealthy are taking 90 percent of the earnings, those earnings are not available for others to make, and such a system will remain underfunded.

I'm either asininely wrong in my simplification, or the current tax system is asininely wrong.

The one thing that probably screws up my whole simplification is that the Fed prints more money, thus throwing it into the pot artificially, which screws up any kind of straightforward accounting and defers financial turmoil, which is what we have now.

Just to let you all know, I will be running for president in 2016.

ed

[esantoro]

Here's what I have found out.

These two taxes together are known as self-employment taxes(SECA).

You can deduct only half of what you end up paying in SECA from your gross income for federal tax purposes.

http://www.irs.gov/businesses/small/articl...d=98846,00.html

Even on the small business level, you can begin to see how the tax structures are weighted in favor of corporations and individuals with incomes over $102,000 . And you can begin to see how much the wealthy have to lose with more progressive tax reforms. You can also begin to see how the current tax structure is set up to remove tax revenue from the system and place a proportionately greater tax responsibility on those with lower incomes, those, it is assumed, who would be the most inclined to benefit from services paid for with taxes. This might work out ok if those same tax revenues were not actually going to benefit those individuals who already benefit from the tax structure due to their higher incomes.

My understanding of this system is simplified in this way. Please correct me if I'm wrong.

Let's say that there is a total of $100 out there in the economy. If everyone is taxed at a flat rate of 25 percent, tax revenues would be $25. Perhaps this number could go down to 17 or 18 percent.

We don't have such a system. Our system is something like this, with perhaps a bit of exaggeration for effect, but only a bit. In our system, 90 percent of the people make $10 of the available $100 in the economy. Let's say they are taxed at 25 percent. Their tax contribution is $2.50. The wealthy make the remaining $90 of the available $100. Their tax contribution is $13.50. Total tax revenues to run what needs to be run is $16. In my simplified example, we have a tax system that is funded only 64 percent of what it should be. This is a failing mark, and I bet that a more accurate accounting would reveal a funding of less than 50 percent.

If the wealthy are taking 90 percent of the earnings, those earnings are not available for others to make, and such a system will remain underfunded.

I'm either asininely wrong in my simplification, or the current tax system is asininely wrong.

The one thing that probably screws up my whole simplification is that the Fed prints more money, thus throwing it into the pot artificially, which screws up any kind of straightforward accounting and defers financial turmoil, which is what we have now.

Just to let you all know, I will be running for president in 2016.

ed

Perhaps I should not run for president, as my simplified understanding on closer scrutiny may reveal an economic system of very primitive societies. Imagine if there is finite money available. There would be a more physical and more violent competition for that finite money.

In such a primitive system, those with more physical strength would be the wealthiest. And....

Wait for it.....................

Wait for it................

Wait for it.....................

THE PEOPLE WITH THE MOST PHYSICAL STRENGTH ARE THOSE WHO USE THEIR HANDS IN DAILY LABOR.

[esantoro]

As with my lamp fix, smelting lead, dremel resuscitation, and various other experiments, I can't seem to let this one go either.

It seems to me that civilization has been the progression of power changing hands from the physically, thus biologically, stronger to the physically/ biologically weaker.

Let's pick a CEO at random and a steelworker at random for an all-out brawl and place our bets. It seems that this is what the stock market does but with the advantaged reversed.

All living organisms have a finite lifespan. It seems to me that the pinnacle of human existence was reached when the physically, biologically powerful started losing out in the race, which was a sign of physiological decrepitude in the human race. Assuming early forms of humans existed 400,000 years ago, I say we have no more than 100,000 years left in us. I would further argue, even as a connoisseur of technology and not a Luddite , that the rise of technological technology has actually been a signal of the onslaught of this decrepitude -- like bacteria in a petri dish shitting all over itself and dying out amid the waste.

It seems that this thread has veered off-topic and should be placed in its respective category. Not true.

Death and taxes. Death and taxes.

Here's what I have found out.

These two taxes together are known as self-employment taxes(SECA).

You can deduct only half of what you end up paying in SECA from your gross income for federal tax purposes.

http://www.irs.gov/businesses/small/articl...d=98846,00.html

Even on the small business level, you can begin to see how the tax structures are weighted in favor of corporations and individuals with incomes over $102,000 . And you can begin to see how much the wealthy have to lose with more progressive tax reforms. You can also begin to see how the current tax structure is set up to remove tax revenue from the system and place a proportionately greater tax responsibility on those with lower incomes, those, it is assumed, who would be the most inclined to benefit from services paid for with taxes. This might work out ok if those same tax revenues were not actually going to benefit those individuals who already benefit from the tax structure due to their higher incomes.

My understanding of this system is simplified in this way. Please correct me if I'm wrong.

Let's say that there is a total of $100 out there in the economy. If everyone is taxed at a flat rate of 25 percent, tax revenues would be $25. Perhaps this number could go down to 17 or 18 percent.

We don't have such a system. Our system is something like this, with perhaps a bit of exaggeration for effect, but only a bit. In our system, 90 percent of the people make $10 of the available $100 in the economy. Let's say they are taxed at 25 percent. Their tax contribution is $2.50. The wealthy make the remaining $90 of the available $100. Their tax contribution is $13.50. Total tax revenues to run what needs to be run is $16. In my simplified example, we have a tax system that is funded only 64 percent of what it should be. This is a failing mark, and I bet that a more accurate accounting would reveal a funding of less than 50 percent.

If the wealthy are taking 90 percent of the earnings, those earnings are not available for others to make, and such a system will remain underfunded.

I'm either asininely wrong in my simplification, or the current tax system is asininely wrong.

The one thing that probably screws up my whole simplification is that the Fed prints more money, thus throwing it into the pot artificially, which screws up any kind of straightforward accounting and defers financial turmoil, which is what we have now.

Just to let you all know, I will be running for president in 2016.

ed

Edited May 27, 2009 by esantoro

[rdb]

I don't make enough to pay myself anything, nevermind the payroll taxes, but you sure do seem to be enjoying this one sided conversation.ROFL.

[esantoro]

I don't make enough to pay myself anything, nevermind the payroll taxes, but you sure do seem to be enjoying this one sided conversation.ROFL.

Many corporations also function in ways that on the surface make it appear that they don't make any money. That could be an advantage for a couple of years. In the world of taxation, I am finding out, it appears that losses are not always losses,and gains not always gains. That's way a corporation makes a profit by paying teams of accountants millions of dollars. That's why many CEO's get paid primarily in bonuses.

The one-sided conversation? I had to throw the ideas against the wall to see how they run down.

Blissful Insanity.

Ed

[electrathon]

My understanding of this system is simplified in this way. Please correct me if I'm wrong.

I'll jump in so you are not just talking to yourself. This is a few years old but the numbers are still very similar:

Understanding the Tax System This is a VERY simple way to understand the tax laws. Suppose that every day, ten men go out for dinner. The bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this.

The first four men -- the poorest -- would pay nothing;

The fifth would pay $1:

the sixth would pay $3;

the seventh $7;

the eighth $12;

The ninth $18. >

The tenth man -- the richest -- would pay $59.

That's what they decided to do. The ten men ate dinner in the restaurant every day and seemed quite happy with the arrangement -- until one day, the owner threw them a curve. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily meal by $20. "So dinner for the ten only cost $80.

The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still eat for free. But what about the other six -- the paying customers? How could they divvy up the $20 windfall so that everyone would get his "fairshare?" The six men realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would end up being *paid* to eat their meal. So the restaurant owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so the fifth man paid nothing,

the sixth pitched in $2,

the seventh paid $5,

the eighth paid $9,

the ninth paid $12,

leaving the tenth Man with a of $52 instead of his earlier $59.

Each of the six was better off than before. And the first four continued to eat for free. But once outside the restaurant, the men began to compare their savings. "I only got a dollar out of the $20," declared the sixth man. He pointed to the tenth. "But he got $7!" "Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got seven times more than me!" "That's true!" shouted the seventh man. "Why should he get $7 back when I got only $2? The wealthy get all the breaks!" "Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"

The nine men surrounded the tenth and beat him up. The next night he didn't show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered something important. They're $52 short! And that, boys and girls, journalists and college instructors, is how the tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up at the table anymore.

Not the answer to your social security tax question, but addresses your tax percentage part.

[rdb]

shhhhh..don't reveal the secrets!

Look, self employment is a tough row. Small business to the government means in the low millions, not thousands. Anything less is just considered peons scratching out an existence. BUT we are the ones that actually pay our taxes. We don't have a bureau full of tax attorneys, and have to pay just what the numbers say.

The good part of starting a business, is the few years you have to make a profit. It's those years you sink everything back into the business. Paying yourself is nice, but building the business by buying equipment, and materials will help you to keep that business going for a longer time.

Paying yourself is of course, exactly why we do this, and paying into social security helps you later on in life. I've only a few years left before I collect, and I wished I had paid more into it. The nickels start counting then.

All the flat taxers, and such are really just deluding themselves. You are right though, the top one percent own 90% of everything. There is something fundamentally wrong with that. That's what the current administration is trying to deal with. How do we improve the situation so that all boats rise?

First, REGULATE. Offshore avoidance of their fair share of taxes has been a big loss to us citizens. The Bernie Maddoxes, the AIG hornswaggles, etc. have all been rooted in deregulation. Lay down some frikkin rules for crying out loud! The free enterprise system works in theory, but in reality, people can be dishonest, and greedy. Free Enterprise needs rules.

Secondly, no matter what side of the fence you sit, everything is political. We can't sit and gripe, and expect anything to change, without getting off our duffs and changing it. Join the local Party, and help get people elected that you believe in. We are America, America is not some organization run by "Them". It's the little old lady in the back licking stamps. And she's pissed!...lol

[electrathon]

Back to the origional: I read too that you can deduct half of the self employment tax from your gross earnings.

Self-employment tax deduction. You can deduct half of your SE tax in figuring your adjusted gross income. This deduction only affects your income tax. It does not affect either your net earnings from self-employment or your SE tax.

This is similar to if you were working for an employer. Your employer is also paying the 6.2 percent match that you are paying. This is part of your salery. You are not deducting that part, so it is a similar situation. Just that you are seeing both sides of the unfair way business are treated in our tax system.

In some of your posting you seem to be mixing the understanding of social security taxes (government retirement) and federal or state taxes (funding the bowels of government). They are differant.

[rdb]

When I was a builder, it was nothing for me to have to pay out FICA/unemployment/etc, in the area of 20,000 a whack, and I was a lttle guy! If you didn't put it aside, you were in trouble when it came due. So consider yourself fortunate, you are only dealing with the one employee. The paperwork alone becomes a two person job!

I read the other day, that in reality, whether you were in the 15% bracket, or the 35%, when all is said and done, the percentage of our taxes, including all the extra fees, sales taxes, etc., approaches the 48% range. This is very close to the 54% or so foreign countries have. So although there is a lot of people who say things like, "Sure they have medical insurance, but look what they have to pay in taxes."

In reality, it's what we get back from paying those taxes that should concern us. We pay out almost as much as they do, but get less back. Although paying out of pocket for taxes, and SS hurts, what really costs business, or the self employed is the medical insurance. $600-$1000 a month for medical insurance should be the thing that really gets everyone's dander up!

With Single Payer Insurance, business, small or otherwise, would see a huge boost to their bottom line. Seems like common sense to me. 15% tax would then seem like a bargain....