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For 2013, the maximum taxable social security income for employees on wages is $113,700, and for self employed individuals it is also $113,700 (though obviously at a higher rate).

Suppose a person is a full time employee for part of 2013 (thus receiving W2 wages), then leaves that job and becomes self employed, thereby earning income as a self-employed independent contractor for the rest of 2013. Which of the following scenarios accurately describes the SS taxes that must be paid in 2013? To make a concrete scenario, assume the W2 wages were $75,000 and the total 1099 income is also $75,000.

  1. 6.2% on the $75,000 in W2 wages, then 12.4% on $38,700 of the 1099 income (=$113,700 - $75,000). The rest of the 1099 income for the year ($36,300) is not subject to SS tax.
  2. 6.2% on the $75,000 in W2 wages, then 12.4% on all of the 1099 income $75,000.
  3. Something else...?
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    1. is essentially correct except that the doubling of the SS tax rate is actually two different taxes in equal amounts, the SS tax that you pay as an employee (of yourself) and the SS tax that your employer (you again!) pays as an employer. Both of these are computed on Schedule (or is Form?) SE and included in the amount that shows up on page 2 of Form 1040 as self-employment taxes that are due. On the other hand, you get to deduct half of the SS (and Medicare) tax computed on Schedule SE from your income in arriving at your Adjusted Gross Income (AGI) and hence from taxable income. – Dilip Sarwate Apr 13 '13 at 19:07
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    If the order is reversed, the company will continue to take 6.2% from your paycheck until they know you have reached 113,700 with them. The excess will be refunded when you file your taxes. – mhoran_psprep Apr 13 '13 at 19:13
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    @DilipSarwate - another great answer loaded as a comment. I humbly suggest moving it. – JoeTaxpayer Apr 13 '13 at 19:33
  • @JoeTaxpayer Thanks for the suggestion. I posted the original comment in a hurry (plane about to land), and so I added a few extra words to (and incorporated mhoran_psprep's point into) my answer. – Dilip Sarwate Apr 14 '13 at 0:10
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Your #1 is essentially correct except that the doubling of the SS tax rate is actually two different taxes in equal amounts; the SS tax that you pay as an employee (of yourself) and the SS tax that your employer (you again!) pays on the wages paid to an employee. Both of these taxes are computed on Schedule SE (as well as the employee's and employer's share of Medicare taxes) and included in the amount that you list on page 2 of Form 1040 as self-employment taxes that are due.

On the other hand, you get to deduct half of the SS (and Medicare) tax computed on Schedule SE from your income in arriving at your Adjusted Gross Income (AGI), and hence from taxable income.

To ameliorate matters a little more, you (as an employer) don't need to issue a W-2 form to yourself (as an employee) with Copy A to IRS, Copies B, C and 2 to you etc. As mhoran_psprep points out, each of the other employers paying you W-2 wages must withhold Social Security taxes until the wages that each is paying exceeds the limit, without regard to what any other employer (including you) might be paying you.

The excess withholding, if any, gets credited to you on your Form 1040 (thus reducing the income tax due or increasing the refund). To the best of my knowledge, those other employers get no corresponding refund of the employer's share of Social Security tax that they paid to the IRS on the wages that they paid you.

  • Thanks, I should have checked out Schedule SE earlier. Makes sense now. – Jeff Evans Apr 15 '13 at 16:56

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