Filing & Paying Business Taxes (Part 4)

Filing & Paying Business Taxes

Continued from last week

Social security coverage. Social security benefits are available to self-employed persons just as they are to wage earners. Your payments of SE tax contribute to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits. By not reporting all of your self-employment income, you could cause your social security benefits to be lower when you retire.

How to become insured under social security. You must be insured under the social security system before you begin receiving social security benefits. You are insured if you have the required number of credits (also called quarters of coverage), discussed next.

Earning credits in 2006 and 2007. For 2006, you received one credit, up to a maximum of four credits, for each $970 ($1,000 for 2007) of income subject to social security taxes. Therefore, for 2006, if you had income self-employment and wages) of $3,880 that was subject to social security taxes, you received four credits ($3,880 + 970). For an explanation of the number of credits you must have to be insured and the benefits available to you and your family under the social security program, consult your nearest Social Security Administration (SSA) office. Making false statements to get or to increase social security benefits may subject you to penalties.

The Social Security Administration (SSA) time limit for posting self-employment income. Generally, the SSA will give you credit only for self-employment income reported on a tax return filed within 3 years, 3 months, and 15 days after the tax year you earned the income. If you file your tax return or report a change in your self-employment income after this time limit, the SSA may change its records, but only to remove or reduce the amount. The SSA will not change its records to increase your self-employment income.

You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies. 1. Your net earnings from self-employment (excluding church employee income) were $400 or more. 2. You had church employee income of $108.28 or more. The SE tax rules apply no matter how old you are and even if you are already receiving social security or Medicare benefits.

SE tax rate. The SE tax rate on net earnings is 15.3% (12.4% social security tax plus 2.9% Medicare tax).

Maximum earnings subject to SE tax. Only the first $94,200 of your combined wages, tips, and net earnings in 2006 is subject to any combination of the 12.4% social

security part of SE tax, social security tax, or railroad retirement (tier 1) tax. All your combined wages, tips, and net earnings in 2006 are subject to any combination of the 2.9% Medicare part of SE tax, social security tax, or railroad retirement (tier 1) tax. If your wages and tips are subject to either social security or railroad retirement (tier 1) tax, or both, and total at least $94,200, do not pay the 12.4% social security part of the SE tax on any of your net earnings. However, you must pay the 2.9% Medicare part of the SE tax on all your net earnings. Deduct one-half of your SE tax as an adjustment to income on line 27 of Form 1040.

This column is offered as a public service with the understanding that each person's tax situation is different; and that you should consult your CPA before taking any action based upon comments made in this article. Call me and I will be happy to explain my “CPA Quality Tax Preparation at H&R Block Rates”.  I can be reached at 825-2771.

Continued next week