The Federal Insurance Contributions Act imposes both a Social Security tax and a Medicare tax on income you earn from working during the year. When you work as an employee, you split the tax with your employer and your employer simply takes it out of your paycheck. You almost never get to claim this money on your tax return.
The FICA taxes collected by your employer aren't counted against your personal income taxes owed for the year. The only time that you do get to claim some of the FICA taxes paid on your personal tax return is if you worked two or more jobs and your total salary exceeds the Social Security wage base for the year, which is $113,700 as of 2013. In that case, you might have excess Social Security taxes withheld that you can claim. For example, if you earn $113,700 at one job and $50,000 at your second job, both jobs would withhold Social Security taxes on the entire amount because neither employer tells the other how much you make. So, when you file your income taxes, you get to request a refund of the Social Security taxes on $50,000 of your income on line 69 of Form 1040.
Though self-employment taxes include the same taxes -- Social Security and Medicare -- as FICA taxes, they're treated differently on your income taxes. See, when you're self-employed, you pay the equivalent of both the employer and the employee portion of the FICA taxes. Because businesses get to write off the employer portion of FICA taxes, the IRS lets self-employed folks write off an equivalent portion of their self-employment taxes. For example, in 2013, the self-employment tax is 15.3 percent compared to 7.65 percent for employees and 7.65 percent for employers.
Calculating Self-Employment Tax Deduction
The deduction for your self-employment taxes equals half of the amount you owe for the year. For example, if you owe $8,000 in self-employment taxes, you get a $4,000 tax deduction on your income taxes. Though both self-employment taxes and income taxes are paid in one big bill, they're calculated separately, so the deduction won't help further decrease your self-employment tax bill.
When you file your taxes with self-employment income, you must file Schedule SE to calculate your self-employment tax for the year. Conveniently, Schedule SE also includes a line that calculates your self-employment tax deduction, which is taken as an adjustment to income on line 27 of Form 1040. Since it's an adjustment to income, you can claim it regardless of whether you itemize.
- Internal Revenue Service: Topic 554 -- Self-Employment Tax
- Internal Revenue Service: Form 1040 Instructions
- Social Security Administration: Social Security & Medicare Tax Rates
- Social Security Administration: Contribution and Benefit Base
- Internal Revenue Service: Topic 608 - Excess Social Security and RRTA Tax Withheld
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