For taxpayers who receive both salary as an employee and self-employment income as an independent contractor in the same year, which of the following statements regarding FICA and self-employment taxes is most accurate?

Question

Quizplus · Accepted Answer

For taxpayers who receive both salary as an employee and self-employment income as an independent contractor in the same year, they will be subject to both FICA taxes and self-employment taxes. FICA taxes are paid by both the employee and employer to fund Social Security and Medicare programs. Self-employment taxes are paid by individuals who work for themselves to fund the same programs.

The Social Security tax only applies to a certain amount of earnings each year, which is known as the Social Security limit. For 2021, the Social Security limit is $142,800. This means that any salary or self-employment income earned above this amount is not subject to Social Security tax.

In this case, the salary earned by the taxpayer as an employee will first be applied against the Social Security limit. Once the limit is reached, any further salary earned will not be subject to Social Security tax. However, the self-employment income earned by the taxpayer as an independent contractor will also be subject to the Social Security tax, and will be applied against the Social Security limit separately. This means that the taxpayer may end up paying Social Security tax on both their salary and self-employment income up to the limit, depending on how much they earn.

Therefore, the most accurate statement is that salary is first applied against the Social Security limit and then self-employment income is applied against the Social Security limit (choice C).

For Taxpayers Who Receive Both Salary as an Employee and Self-Employment