From ScienceWriters: Rule changes for Social Security taxes

ScienceWriters Fall 2016 cover

By Julian Block

Writers know that the Affordable Care Act (ACA), a.k.a. Obamacare, overhauled the rules for medical insurance. What they might not know is that the ACA’s overhaul also changes 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 (SE) income above the thresholds.

What’s unchanged

Writers with salaried jobs. The ACA left unchanged writers’ liability for Social Security taxes, levies known officially as FICA (short for Federal Insurance Contribution Act) taxes. Longstanding 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 that have been on the books for eons 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 are liable for SE taxes. Think of them as Social Security taxes for the self-employed.

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 SE 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), up to a limit of $118,500 for 2016 (same as for 2015). Consequently, withholding from paychecks for Social Security taxes ends at $118,500.

The other FICA rate is 1.45 percent for the Medicare fund (the federal hospital insurance program for the elderly). There is no ceiling on the amount of wages subject to the 1.45 percent rate, meaning employees with earnings above $118,500 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 SE taxes. They still are 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, SE 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 $118,500 for 2016 (again, same as for 2015).

The other SE rate is 2.9 percent for the Medicare fund. There is no ceiling on the amount of net earnings subject to the 2.9 percent rate, meaning self-employed persons with earnings above $118,500 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).

Deduction for part of SE tax. To somewhat ease the hurt, selfemployed individuals are able to recoup some of their taxes. They get to deduct one-half of the SE tax (line 27 of the 1040 form).

This kind of write-off is an “above-the-line” adjustment, meaning it is subtracted from gross income to arrive at adjusted gross income, just the same as, say, money set aside in IRAs and other kinds of tax-deferred retirement arrangements, alimony payments and job-related moving expenses. Consequently, the write-off is allowable whether individuals itemize deductions for mortgage interest, real estate taxes and the like on Schedule A of Form 1040 or use the standard deduction.

Julian Block is an attorney and author based in Larchmont, N.Y. He has been cited as: “a leading tax professional” (New York Times); “an accomplished writer on taxes” (Wall Street Journal); and “an authority on tax planning” (Financial Planning Magazine). _Information about his books is at julianblocktaxexpert.com.