Self Employment Tax Rate for 2011

by Khaleef Crumbley on January 26, 2011

in Taxes

Self Employment Tax

There were a lot of last-minute changes to the tax code for 2011, including the payroll tax holiday. This not only means a lot of changes for individual tax payers, but also for those who pay self employment tax.

How The Payroll Tax Holiday Affects Self Employment Tax

Normally, the self employment tax would include both the employer’s and employee’s share of the Medicare and Social Security Tax. So the self employment tax rate would normally be 15.3% – 12.4% for Social Security Tax (6.2% for both the employee and employer share), and 2.9% for Medicare (1.45% for both).

Due to the payroll tax holiday, the employee share of the Social Security Tax has been reduced to 4.2%, with the employer share staying the same. This means that now the full self employment tax for 2011 will be 13.3% – 10.4% to cover the Social Security Tax.

The IRS had this to say regarding Medicare:

The Hospital Insurance (HI) or Medicare tax remains at 1.45% of wages, for both employee and employer. Employers should not make any adjustment to the withholding and payment of Medicare tax for any employees, including government employees who are covered by Medicare tax only (not social security).

Be sure to take a look at all of the income tax rates for 2011. Keep in mind that if you are one of those fortunate people who make money blogging, this may affect you as well!

How To Implement The New Self Employment Tax Rate And Payroll Tax Holiday

Since self employed individuals pay their Social Security Tax through estimated tax payments four times a year, they can apply the lower tax rates while calculating their estimated payment.

If you are reading this and you have employees, then you are responsible for adjusting the withholding rates of your employees. You will have until January 31, 2011 to make the change in their payroll systems, due to the late passing of the Tax Relief Act (which also lead to the tax filing delay, and the tax deadline being extended).

How Much Can The Payroll Tax Holiday Cut From Your Self Employment Tax Bill?

The payroll tax holiday essentially means that workers who currently pay into the Social Security system will receive a 2% pay increase in 2011. For 2011, Social Security OASDI (Old-Age, Survivors, and Disability Insurance) payroll tax is only applied to the first $106,800 that a taxpayer earns, and so the benefit will only be fully realized by workers who make that or less in 2011.

So the most that any worker can save from this change is $2,136 (2% of the $106,800 wage base).

What To Do With The Extra Money?

That’s the second time I’ve been asked that question! You can use the extra money to increase your retirement account by taking advantage of the 401k contribution limits or at least enough to get the full 401k employer match!

You can even open up an IRA for 2010 in order to increase your 2010 tax return, or build up one for this year – here are the IRA contribution limits.

photo by Saad.Akhtar

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© 2011, Khaleef Crumbley. All rights reserved.

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{ 5 comments… read them below or add one }

1 Amanda L Grossman

Great info! I will definitely be paying self-employment tax this year…very exciting:).


2 brokeprofessionals

Can’t wait until these taxes apply to me. But as for right now, I’m with good old W-2. Thanks for laying it all out for everyone.


3 Amanda L Grossman

Thank you for the heads up!


4 Everyday Tips

I didn’t even think about how the reduction in social security tax would affect the self employed- great deal.

I just hope people save the money instead of blow it.


5 Jeff @ Sustainable Life Blog

This is some great advice khaleef. I’ve been curious as to how self employed individuals were going to deal with this tax break, as I’ve seen the effects of it in my check already. It’s nice that taxes are being lowered, but unfortunately something’s going to need to be done about social security.


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