Forget that error, just explain your odd claim that someone who is self employed and in the 28% tax bracket only pays 73% of the 15.3% FICA tax. That is the math I would like to see. Still waiting...
Well actually it should have read 72% of half or 86% of the total.
I read through your examples and you didn't account for the change in your taxable income from line 22 to line 37, the adjusted gross, due ONLY to the SE deduction. To see the difference try adding back the deduction. Sure the line that adds SE tax to your tax payments stays the same as the last line in the SE form because that is the amount that will be added to your total SE tax paid over your lifetime over at SSA, but line 57 is lower by an amount that is exactly 28% of the SE deduction.
Maybe to understand the effect of the marginal rate on SE you need to look at someone who normally pays zero Federal tax and then change the marginal rate. Imagine someone whose self-employed income would be in the zero bracket but they file jointly and their spouse's income brings them up to the 28% bracket.
11,000
x .9235 = 10,158.5
SE tax = 10,158.5*.153= 1554.25
1554.25/2= 777.12
777.12*.28 = 217.59
1554.25 - 217.59= 1336.66
using the gross income: 1336.66/11,000=12.15%
using the equivalent income: 1336.66/10,158.5=13.15%
Then compare to someone who stays in the 0% bracket:
11,000
x .9235 = 10,158.5
SE tax = 10,158.5*.153= 1554.25
1554.25/2= 777.12
777.12*.28 = 217.59
AGI is now 11,000-217.59=10782.41
Now on this person changing the AGI makes no difference in their tax paid because they are below the income tax threshold that triggers income tax, they still pay $1554.25 or 15.3% of the equivlent because they have zero in line 57.
The difference between the two payments 1554.25-1336.66=217.59
The person in the 28% marginal bracket pays 86% of what the person in the zero bracket pays even though they have identical self-employment incomes. edit: But then of course they still get screwed in that all of the rest of their income is subject to 28% Federal income tax.
Now let's do the same exercise with your guy at 95k:
95,000
x .9235 = 87732.5
* .153 SE tax = 13423.0725
half deductible= 6711.53625
6711.53625*.28= 1879.23015
Total SE minus the deduction allowed 13423.0725-1879.23= 11543.8425
using the gross income: 11543.84/95000= 12.15%
using the equivalent income: 11543.84/87732.5=13.15%
A person with employment income equal to the equivalent of 87732.5 pays 6711.07 and his employer pays 6711.07 for a total of 13423.07
11543.84/13423.07=86%
The only reason I'm more aware of this is because I've been self employed long enough to remember when half of SE wasn't deductible.
BTW the "equivalent" is to make up for the fact that a portion of income for an employed person isn't subject to FICA, that employer half of FICA. Thanks for reminding me of that, I completely forgot about it since it has been a very long time since I did a tax return long hand. I was definitely wrong on that issue. |
