The Self Employed Pay The Bill.

Millions of Americans are self employed: Artists, plumbers, landscapers, financial advisors, carpenters, restaurant owners, consultants, tax preparers, bloggers, software developers and others. There are more than 20 million small businesses and most of them are sole proprietors. They pay a self employment tax equal to 15.3% of the net profit of their business. However, the sole proprietor's net profit is not the same as net profit for a corporation.

In the net profit for a corporation, officers salaries are deducted before computing the business net profit. Further the business pays, as a business expense, 50% of the 15.3% and the employees pays the other 50%. However, in a sole proprietorship, the net profit excludes any monies paid to the owners. If a tax payer is a sole proprietorship, and the business has a profit of $100,000 after deducting business expenses, the owner pays a SE tax of 15.3% less some complicated corrections.

It has been 15.3% since 1990, however in 1990 the social security income limit was $51,300. While the 15.3% percentage has stayed the same for more than 20 years, the limit, which is now $106,800, has more than doubled. For example, a self employed person who earned $100,000 incurred a SE tax liability of $7,650 in 1990 and a SE tax liability of $15,300 in 2010. Now it is a bit more complex.  The federal government in the interest of equity for the self employed allows the self employed to deduct 7.65% before computing the actual tax liability, which knocks off about $1,200 off the $15,300. The IRS then allows the self employed person to deduct 1/2 of the SE tax liability, before calculating the person's taxable income, then adds back the full SE tax to the taxpayers final tax bill. Get it. The arithmetic, of calculating, then  subtracting, then computing, then subtracting, then adding back again, masks the original tax rational.

For the record, the 15.3% includes 2.9% for medicare tax and 12.4 % for social security tax. The social security tax currently stops at $106,800, but the 2.9% medicare tax has no upper limit, The more you earn the more you pay.

If a tax payer is a sole proprietor and makes $100,000 per year after expenses, the TP will pay $15,300 to the FG for self employment tax, plus a chunk of change for federal taxes too.

If you have followed all this explanation and understand it, then you are a tax professional. If  you understand why the IRS has such a complicated tax code, then you must be in congress. If you pay the SE tax as well as pay your tax professional to complete all the forms, but really do not understand it, then you are a sole proprietor working most of the year for the federal government.

Now there is a rational for the tax code, but not for the complexities. And because of these complexities, sole proprietorships, the foundation of American business, are motivated to earn less and expense more.