Temporary Employee/Self-Employed Payroll Tax Cut for 2011

The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers—one for Old Age, Survivors and Disability Insurance (OASDI; commonly known as the Social Security tax), and the other for Hospital Insurance (HI; commonly known as the Medicare tax). Under pre-Act law, the FICA tax rate for employees and employers is 7.65% each—6.2% for OASDI and 1.45% for HI. Under the Self Employment Contributions Act (SECA) tax, self-employment income of self-employed taxpayers is subject to a tax of 15.3%—12.4% for OASDI and 2.9% for HI. There is a maximum amount of compensation subject to the OASDI tax (the wage base), but no maximum for HI. The wage base is $106,800 for 2010 and 2011.

Under pre-Act law, for computing the income tax of an individual, Code Sec. 164(f) allows an above-the-line deduction equal to 50% of the amount of the SECA tax imposed on the individual's self-employment income for the tax year.

Under Code Sec. 1402(a)(12), a taxpayer is allowed a deduction in computing net earnings from self-employment equal to: (1) net earnings from self-employment as determined before taking the Code Sec. 1402(a)(12) deduction into account, multiplied by (2) one-half the sum of the OASDI tax rate and the HI tax rate. This deduction is allowed in computing net earnings from self-employment in lieu of the Code Sec. 164(f) above-the-line deduction of one-half of the self-employment tax.

Thus, the Code Sec. 164(f) deduction can't be taken in computing self-employment tax liability. The Code Sec. 1402(a)(12) deduction is designed to put the self-employed in the same position as employees in that they don't have to pay self-employment tax on about half of the amount of the tax itself. New law.

For remuneration received during 2011, the Act reduces the employee OASDI tax rate under the FICA tax by two percentage points to 4.2%. Similarly, for self-employment income for tax years beginning in 2011, the Act reduces the OASDI tax rate under the SECA tax by two percentage points to 10.4% percent. (Act Sec. 601) As a result, for 2011, employees will pay only 4.2% Social Security tax on wages up to $106,800 and self-employed individuals will pay only 10.4% Social Security self-employment taxes on self-employment income up to $106,800.

Posted: December 2010

Bassman, Laserow & Company, PC
350 Sentry Parkway East
Building 630, Suite 200
Blue Bell, PA 19422
voice: 215-628-0420
fax: 215-628-3461
email: Bassman, Laserow
print: driving directions