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Social Security and Medicare taxes In addition to the regular federal income tax, taxpayers pay the Social Security and Medicare taxes on "earned" income, i.e., money you work for. These taxes are imposed on "wages," for taxpayers who are employees, and on "net self- employment income" for self-employed taxpayers. Of course, someone may be both an employee and have a business or activities that generate self-employment income. For self-employed taxpayers, the Social Security tax is 12.4% of the first $137,700 (the wage base") of net self-employment income (in 2020) and 2.9% (the Medicare tax) on all net self-employment income. So, for example, a taxpayer with $150,000 of net self-employment income pays 12.4% x $137,700 ($17,074.80) + 2.9% x $150,000 ($4,350), for a total of $21,424.80. In computing his or her regular federal income tax, a self-employed taxpayer will take an above-the-line deduction equal to half (50%) of the tax paid (here, that would be $10,712.40). [The $137,700 wage base increases each year to reflect inflation.] For taxpayers who are employees, 50% of the burden is carried by the employer. So, for the Social Security tax, only 6.2% (not 12.4%) is withheld from the taxpayer's wages up to $137,700, and only 1.45% (not 2.9%) of the total wages is withheld for the Medicare tax. The total amount of tax withheld is then matched by the employer out of its own funds. If an employee has two jobs in one tax year, he may have too much Social Security tax withheld. In that case, he should get a refund of (or credit for) the over-withheld amount via his regular tax return. For example, say in 2020 Tom has one job for which his wages are $75,000 and another job for which his wages are $85,000 (for total wages of $160,000). Each employer withholds 6.2% of the wages because the wages from each job are below the $137,700 wage base. So he has paid a total of $9,920 in Social Security tax ($160,000 x. 6.2%). But he is only supposed to pay Social Security tax on his first $137,700 of wages. This would be $8,537.40 ($137,700 x 6.2%). So Tom overpaid by $1,382.60 ($9,920 - $8,537.40). He will claim a credit in this amount on his tax return which will reduce his regular tax liability or result in a tax refund. If a taxpayer has both wages as an employee and self-employment income, here is how the taxes are determined. Suppose Tom has $50,000 of wages, and $100,000 of net self-employment income (for total earned income of $150,000). For the Social Security tax, he will pay 6.2% on his $50,000 of wages (via withholding by his employer) (This comes to $3,100). This uses up $50,000 of the $137,700 wage base. $137,700 - $50,000 = $87,700. He then pays 12.4% (the self- employment tax rate for Social Security taxes) on only $87,700 of his self-employment income. This comes to $10,874.80. The rest of his self-employment income is not subject to the Social Security tax since the base amount has been reached ($50,000 + $87,700). He has thus paid Social Security taxes on a total of $137,700 of income (at the employee rate of 6.2% on $50,000; and at the self-employed rate of 12.4% on $87,700). He also pays 1.45% (via withholding) for the Medicare tax on his $50,000 of wages ($725), and 2.9% on all of his net self-employment income of $100,000 ($2,900). So the total tax paid is $3,100 + $10,874.80 + $725 + $2,900, which comes to $17,599.80. Of this total, the "self-employment" portions of the taxes are $10,874.80 + 2,900, which comes to 13,774.80. So, Tom will be able to deduct 50% of this amount ($6,887.40), as an above-the-line deduction in computing his regular income tax. + Additional tax. For wages and/or self-employment income above $200,000 ($250,000 on a joint return) an additional 0.9% of tax will apply. For wages it is withheld by the employer (but not matched). For taxpayers who have both wages and self-employment income, the wages are counted first. For example, Gina has $125,000 of wages and $100,000 of self-employment income. The wages do not exceed $200,000 so Gina's employer will not withhold the additional 0.9%. Gina has an additional $75,000 of earned income that is not subject to the additional tax ($200,000 - $125,000). Thus, on her $100,000 of self-employment income, only $25,000 is subject to the additional tax and she will owe $225 ($25,000 x 0.9%). In 2020, Frank earns $17,700 in wages as an employee, and has $150,000 of net self-employment income. He has $1,354.05 in Social Security and Medicare tax withheld from his wages ($17,700 x 7.65%). In addition to that amount, how much Social Security and Medicare tax will he owe on his self-employment income? $17,074.80. $19,230. $22,950. None of the above