Write From Home-Self-Employment Taxes Increase Again

Self-Employment Taxes Increase Again
by Julian Block

There has been an increase for 2005 in the maximum amount of wages subject to FICA (short for Federal Insurance Contribution Act) taxes, better known as Social Security taxes. About 9.9 million workers will be hit with a higher tab of as much as $130.20 because of an increase in the wage base for the 6.20 percent rate for the Social Security benefits tax. The base went from $87,900 for 2004 to $90,000 for 2005.

Self-employment taxes (Social Security taxes for the self-employed) also are going to be higher for many freelance writers and other individuals who operate their businesses or professions as sole proprietorships, in partnerships with others or as independent contractors.

No change in the tax rate of 15.30 percent on net self-employment earnings (receipts minus expenses). But, as is true of FICA taxes, the 15.30 percent tax consists of two components with different rates. The first one is 12.40 percent for the Social Security benefits portion, the old age, survivors, and disability insurance fund, with the earnings base going from $87,900 to $90,000. The second one is 2.90 percent for the Medicare fund, the federal hospital insurance program for the elderly, with no earnings ceiling.

For someone whose earnings during 2005 exceed $90,000, the self-employment tax increases by at least $260.40 (the excess of $90,000 over $87,900 multiplied by 15.30 percent). A self-employed surrenders $29 to Medicare taxes for each $1,000 of earnings above $90,000. When tax time rolls around, do the paperwork for the self-employment tax on Schedule SE, which accompanies Form 1040.

Some Strategies to Trim the Tab
Long-standing IRS regulations allow an individual with more than one self-employed operation to combine the earnings from all of them, so as to offset the losses from one or more businesses against the earnings from those that are profitable.

Or suppose a husband and wife own a business as a partnership and both pay self-employment taxes. They should consider conversion of their business to a sole proprietorship. Elimination of one spouse's earnings means that only one of them remains liable for self-employment taxes.

To somewhat ease the hurt, self-employeds are able to recoup some of their taxes. They get to deduct one-half of the self-employment tax on their 1040 forms.

The IRS characterizes this kind of write-off as an "above-the-line" adjustment, meaning it gets subtracted from gross income to arrive at adjusted gross income at the bottom of page 1 of Form 1040, just the same as alimony payments and contributions to traditional IRAs and other retirement plans. Consequently, the write-off is allowable whether a person itemizes deductions for donations to charities and the like or uses the standard deduction, the no-questions-asked amount that is automatically available without the need to itemize.

Tax Protestors
The IRS has the support of the courts in the agency's crackdown on individuals who claim that they are excused from liability for FICA or self-employment taxes because, in their view, the Social Security system is unconstitutional.

For example, Bruce Hunsberger, a service-station operator in Indiana, got exactly nowhere with his argument that he was the victim of an unconstitutional, government-sponsored scam because Uncle Sam is unlikely "to have enough money to pay his benefits when they become due, especially since the laws are constantly changed." The Tax Court cited Bruce's responsibility to keep kicking in for self-employment taxes even if he ultimately kicks off without collecting any benefits, noting that the system "does not provide the contractual rights normally thought to characterize an insurance program."

This was made expensively clear to George Lee Kindred, the recipient of fees for a series of speeches in which he urged his audiences to revolt against the income-tax system. He, too, has to pay self-employment taxes, ruled the Court of Appeals for the Sixth Circuit.

Julian Block is a syndicated columnist, attorney and former IRS investigator who has been cited by the New York Times as "a leading tax professional" and by the Wall Street Journal as an "accomplished writer on taxes." His "Tax Tips For Freelance Writers, Photographers And Artists" shows how to save truly big money on taxes—legally—and explains the steps you should take to reduce taxes for this year and even gain a head start for future years. Send $9.95 for an e-mailed copy or $14.95 (in the U.S.) for a postpaid copy to:

J. Block
3 Washington Square, #1-G
Larchmont, NY 10538-2032.

Contact him at julianblock@yahoo.com

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