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In practice, Ramon will probably have the full 6.2% taken from his paycheck until the
$5,840.40 maximum is reached, at which point Social Security taxes will stop being with-
held from his check until the beginning of the next year.
Because deductions, credits, and so on do not apply to FICA taxes, there is no need
to file a tax return for them at the end of the year. The sole exception would be the
rare situation where someone earns more than the Social Security maximum, but has
that income coming from more than one employer. For example, if you earn $89,000
from one job and $37,000 from another job on the side, both employers will withhold
the full 6.2% for Social Security (since you are not reaching the maximum at either
of the two jobs, and one employer cannot be expected to keep track of how much you
have been paid by another). Since the tax actually applies to only $94,200 of income,
though, you would be eligible to claim a refund of any over payment at the end of the
year.
For the self-employed, FICA taxes must be handled a bit differently, since you are your
own employer in that case. For the self-employed, FICA taxes become the so-called self-
employment tax. A self-employed worker must pay both the employer and employee share
of FICA. This tax is included in the quarterly estimated tax payments that would be made,
and a final calculation of the total owed for the year is done as part of the usual annual
income tax filing.Example 9.2.10 Heather is a self-employed plumber who earned $47,600 in 2006.
Calculate her self-employment tax.Her Social Security tax is (2)(6.2%)($47,600) $5,902.40. Her Medicare tax is (2)(1.45%)
($47,600) $1,380.40. Note that we multiplied both of these by 2 since she is paying
both employer and employee shares of the tax. The total is $5,902.40 $1,380.40
$7,282.80.Sometimes, other payroll taxes for things such as state disability insurance taxes or other
similar taxes must be paid. Generally, these are small in comparison to Social Security and
Medicaid; mathematically they usually work in much the same way.
Note that FICA taxes are paid on income from employment only. Income from interest,
investments, and so on is not subject to this tax.Business Income Taxes
Just as the incomes of individuals are subject to tax, so are the incomes (i.e., profits) of
businesses. A business owner must make sure to collect the appropriate taxes from her
employees, pay her share of the FICA payroll taxes, and must also make sure to pay the
appropriate taxes on the business’s income as well.
When the business is set up as a sole proprietorship, its owner normally would treat
income from the business just like any other income, reporting it on her personal income
tax return and paying income tax. Business income generally requires additional forms to
be filed with the tax return, and may be subject to somewhat different rates and rules, but
is handled as just another type of income.
When the business is set up as a corporation, the corporation itself is a taxpayer, and
may be required to file a tax return and pay income taxes on its own account. The tax rates
and laws that apply to corporations are conceptually similar to those for individuals, but
differ in specific details. Some corporations, known as subchapter S corporations, do not
pay income taxes themselves but instead pass their earnings directly to the stockholders.
This may be done to simplify the tax filings, and also to avoid the double taxation of
earnings. The earnings of a corporation are subject to income tax for the corporation, and
then taxed again as income to the stockholders when paid out in dividends. Subchapter S
corporations avoid this issue. Subchapter S corporations are popular among small busi-
nesses, but subchapter S status is subject to significant limitations and restrictions. It is not
an option for large businesses.9.2 Income and Payroll Taxes 393