How do other wages affect self-employment tax?
If, in addition to your self-employment income, you had other wages, tip income, etc. which were subject to Social Security and Medicare taxes, this additional income may affect what your self-employment tax is. The reason for this relates to how the self-employment tax is calculated, specifically, the fact that the first $94,200 is taxed at a different rate (15.3%) then any earning overs $94,200 (which are only taxed at 2.9%).
More specifically, for the 2006 tax year these additional wages affect your self-employment tax as follows:
1. If your wages, tips, etc. were over $94,200, your self-employment income is only subject to a self-employment tax of 2.9%, no matter how much self-employment income you had. This is because only the first $94,200 of your income is subject to Social Security tax.
2. If your wages, tips., etc., combined with your self-employment net earnings, were under $94,200, all of your self-employment income will be subject to the full 15.3% self-employment tax.
3. If your wages, tips, etc. were under $94,200 on their own, but over $94,200 when combined with your self-employment net earnings, it gets a little more complicated. You will pay a 2.9% tax for all of your self-employment earnings, since the $94,200 cut-off does not apply to the Medicare portion of self-employment tax. As for the 12.4% Social Security tax, that will apply to your self-employment net earnings between your other income and the $94,200 cutoff. For example, if you had $70,000 in wages and an additional $30,000 in self-employment net earnings, your self-employment tax will be: (i) 2.9% of the full $30,000; plus (ii) 12.4% of $24,200 (the difference between $94,200 and your other wages).