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.
- 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.
- 6.2% on the $75,000 in W2 wages, then 12.4% on all of the 1099 income $75,000.
- Something else...?