45.4 How Wages Affect Self-Employment Tax

If you have both a net profit from self-employment and also wage and/or tip income subject to FICA taxes (Social Security and Medicare), the amount of such FICA earnings may affect your self-employment tax liability.

If your 2012 FICA wages or tips were $110,100 or over, your net self-employment earnings (after the .9235 adjustment) are subject only to the 2.9% Medicare rate. If the total of your 2012 FICA wages (and tips) plus net profit was $110,100 or less, all of your net earnings are subject to the 10.4% Social Security rate and the 2.9% Medicare rate. If the total of your 2012 FICA wages and tips plus net earnings was over the $110,100 limit for the 10.4% Social Security rate, the 10.4% rate applies to the lesser of your net self-employment earnings shown on Line 6 of the Long Schedule SE (after the .9235 adjustment), or the excess, if any, of $110,100 over the FICA wages and tips shown on Line 9. The 2.9% Medicare rate applies to the entire amount of net self-employment earnings. See the following Example and the filled-in long Schedule SE worksheet below.

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image Caution
Foreign earned income
Even though you can exclude from gross income your foreign earned income of up to $95,100 in 2012, you are subject to self-employment tax on all of your earnings.
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EXAMPLE
You earn a salary of $38,100 in 2012 and have a net profit from Schedule C of $73,000. Your net earnings from self-employment on Line 6 of the Long Schedule SE shown below are $67,416 ($73,000 × .9235). The Line 9 amount is $72,000, the excess of the $110,100 maximum Social Security tax base over the $38,100 in wages. The 10.4% Social Security rate applies to the lesser amount, the net earnings of $67,416. The 2.9% Medicare rate also applies to the entire net earnings.
     10.4% × $67,416     $ 7,011
       2.9% × $67,416     + 1,955
        8,966
Your self-employment tax liability is $8,966. Of that, $5,166 is deductible on Line 27 of Form 1040.

Worksheet—Long Schedule SE

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