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Proposed Changes to Self-Employment Tax Rules

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The basic idea behind recently propsed changes to the self-employment tax rules is to expand the tax base subject to payroll tax (“General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals,” Department of the Treasury,  May 2021, pp. 65-67 of 107 pages). Mike Pusey, CPA explains what it could mean for affected clients.

Jul 14th 2021
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The Biden administration’s proposals reflected in the “Green Book” include significant revisions in the self-employment tax rules.  Here's what you need to know about what could be coming if these changes take effect.

Overview of Current Rules

The self-employed pay a 12.4 percent tax on earnings of up to $142,800 in 2021 ($137,700 in 2020). If the person has wages and self-employment income, the maximum subject to the self-employment tax is reduced by the wage income for the year.

The Section 199A deduction benefit that is a 20 percent of business income deduction for many taxpayers is income tax only. This deduction doesn’t reduce the base for the self-employment tax. 

There is no net operating loss with the self-employment tax, so your base for computing the tax over two years is the positive business income of the one year, not the net business income over the income year and loss year (Section 1402(a)(4)).

There is also a 2.9 percent Medicare care on self-employment earnings.This is not subject to the maximum of $142,800 in 2021. This portion of the calculation is without limit, so the beginning rate figure in the calculation is the sum of 12.4 percent plus 2.9 percent, or 15.3 percent.

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