Confusing Rule Changes for Social Security Taxes

Jan 9th 2017
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Writers and other freelancers know that the Affordable Care Act (ACA) overhauled the rules for medical insurance. What they might not know is that the overhaul also changed some tax laws.

The ACA includes a provision that could increase Social Security taxes for some writers who are employees and high earners. Similarly, it might increase self-employment taxes for some writers who are freelancers and high earners.

What’s New

Medicare surtax on earned income. What is new and often misunderstood is the ACA’s introduction of an additional Medicare tax of 0.9 percent. The surtax applies to relatively few writers, as it targets only employees and freelancers who are high earners.

The surtax hits joint filers with wages above $250,000 ($125,000 for married couples filing separate returns) and single filers over $200,000. The levy also applies to individuals with self-employment income above the thresholds.

What’s Left Unchanged

Writers with salaried jobs. The ACA left unchanged writers’ liability for Social Security taxes, levies known officially as FICA (short for Federal Insurance Contributions Act) taxes. Long-standing rules require employers to withhold FICA taxes from amounts paid to their employees as wages, salaries, or other forms of compensation.

The ACA made no change in the requirement that employers, too, must ante up. They have to match the payroll taxes that they subtract from wages, etc.

Freelancers. Different rules remain applicable when writers are their own bosses and operate as sole proprietorships, in partnership with others, or as independent contractors. While freelancers sidestep Social Security taxes, they’re liable for self-employment taxes.

How does the IRS treat writers who are employees and moonlight as freelancers, or vice versa? The agency still nicks them for both Social Security taxes and self-employment taxes.

FICA taxes consist of two components with different rates. First, the rate is 6.2 percent for the Social Security benefits portion (the Old-Age, Survivors, and Disability Insurance fund). The maximum amount of earnings subject to Social Security taxes is $127,200 for 2017, up from $118,500 for 2016 (same as for 2015). Consequently, withholding from paychecks for Social Security taxes ends at $127,200 for 2017 and $118,500 for 2016.

The other FICA rate is 1.45 percent for the Medicare fund (the federal hospital insurance program for the elderly). There’s no ceiling on the amount of wages subject to the 1.45 percent rate, meaning employees with earnings above $127,200 for 2017 and $118,500 for 2016 must pay Medicare taxes on every dollar of their salaries, wages, bonuses, commissions, vacation pay, and the like. They surrender $14.50 to Medicare taxes for each $1,000 of compensation ($1,000 multiplied by 1.45 percent).

Self-employment taxes. The ACA left intact the key rules for self-employment taxes. They’re still imposed at a rate of 15.3 percent on net earnings (receipts minus expenses). This is twice the 7.65 percent usually paid by employees because self-employed persons pay both the employer and employee halves.

Like FICA taxes, self-employment taxes consist of two components with different rates. The rate is 12.4 percent for the Social Security benefits portion, up to a limit of $127,200 for 2017 and $118,500 for 2016.

The other self-employment rate is 2.9 percent for the Medicare fund. There’s no ceiling on the amount of net earnings subject to the 2.9 percent rate, meaning self-employed persons with earnings above $127,200 for 2017 and $118,500 for 2016 pay Medicare taxes on every dollar of their earnings. They forfeit $29 to Medicare taxes for each $1,000 of earnings ($1,000 multiplied by 2.9 percent).

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Related articles:

Two Sets of Rules for Social Security Taxes
Untangling the Taxation of Social Security Benefits
Tax Season Reminders About Social Security Numbers
The Birth of Social Security Taxes

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