Confused about self employment taxes

[anikolop]

What is the name of your state (only U.S. law)? Texas

It is my understanding that the SE tax is 15.3% for a self-employed individual. Does that include the 7.65% that the employer is matching for the employee? In other words, when an employer matches the employee's share of FICA, is that the end of his obligation to the IRS? Or does the employer then pay an additional 15.3% on his profits?

 

[davew128]

Not so coincidentally, 15.3 / 2 = 7.65. And employers only pay 15.3% of their profits in SE tax if they are self employed INDIVIDUALS.

 

[anikolop]

So if an employer only has one employee for a small salary his SE taxes would only be 7.65 of that employee's salary? The reason I am confused is that when you fill out the profit/loss schedule to the tax return you are supposed to insert the profit in the SE schedule, which then states you have to multiply by 15.3%. But, in the profit/loss calculation you have to first subtract any wages paid, which would mean that you already had to match the employee's 7.65%. Why then would you then have to proceed to calculate the 15.3% of the profit as well? I am sure that I am grossly misreading something but I can't figure out where I am getting stuck!

 

[davew128]

Employers pay FICA on their employee's wages. Self employed individuals pay SE tax on their profits. They are not the same thing and quite honestly it is not a difficult concept.

 

[anikolop]

A sole proprietor who has employees has to calculate his profit after paying wages. If you pay wages, you have to pay 1/2 of FICA. After you calculate your profit, you then have to fill out Schedule SE and calculate the 15.3% tax. I know you are saying that it is two separate things, but where is that distinction drawn on a tax return which supposes that you pay wages AND make a profit? I don't see anywhere that states if you paid wages DO NOT proceed to Schedule SE.

 

[irsos]

A sole proprietor who has employees has to calculate his profit after paying wages. If you pay wages, you have to pay 1/2 of FICA. After you calculate your profit, you then have to fill out Schedule SE and calculate the 15.3% tax. I know you are saying that it is two separate things, but where is that distinction drawn on a tax return which supposes that you pay wages AND make a profit? I don't see anywhere that states if you paid wages DO NOT proceed to Schedule SE.

A sole proprietor DOES NOT pay wages to himself.

 

[LdiJ]

A sole proprietor who has employees has to calculate his profit after paying wages. If you pay wages, you have to pay 1/2 of FICA. After you calculate your profit, you then have to fill out Schedule SE and calculate the 15.3% tax. I know you are saying that it is two separate things, but where is that distinction drawn on a tax return which supposes that you pay wages AND make a profit? I don't see anywhere that states if you paid wages DO NOT proceed to Schedule SE.

That is because any self employed person who pays wages, and has a profit left over at the end, DOES need to proceed to schedule SE.

Let me try to explain things more clearly. 15.3% of earnings have to be paid for every single person that has an earned income. The question isn't whether or not it has to be paid, but WHO has to pay it. An employee pays 1/2 of it, and their employer pays the other half. A self employed person pays all of it.

Joe is self employed. Joe has self employment gross income of 100k. Joe has employees and uses a payroll service to handle payroll and properly withholds all taxes, and to pay all employer taxes (which includes the employer's share of social security and medicare taxes). After all expenses (including all payroll expenses) Joe has a proft of 25k. That is Joes "earned income". Joe must pay SE taxes on that 25k of earned income.

Now, if instead of being self employed, Joe is organized as an S-corporation and pays himself a regular and reasonable salary with regular withholding, along with the rest of his employees. After all expenses, including Joe's salary, Joe has a profit of 5k. That 5k of profit passes through to his personal return as schedule E income and is NOT subject to SE tax. However the key there is that Joe pays himself a regular and reasonable salary, and the 15.3% does get paid on that regular and reasonable salary.

 

[anikolop]

I meant a sole proprietor who pays wages to employees. If you fill out Schedule C to the tax return and deduct wages paid to employees you get the net profit. This net profit must be reported on Schedule SE. Therefore, doesn't it seem that you pay 1/2 of the FICA for the wages and then proceed to get taxed SE on the profits? I get the impression that you are using the term sole proprietor to mean one who doesn't have employees. But, Schedule C is for sole proprietors and wages is a deduction, which would mean a sole proprietor can have employees.

 

[anikolop]

I think you just answered the question that nobody could for the last 3 days. That is, Joe in your situation would have a payroll company pay the 1/2 share of the fica BUT STILL pay an additional SE tax on the profit that is remaining. The earlier replies to my question made it seem cut and dry that if you are an employer you only pay the matching amount of the employees's fica and that was the end of your obligation. Thank you so much for your detailed response. (BTW, if my summary of your explanation is still off base feel free to ridicule me!)