I am about to start moonlighting to supplement a non physician salary. I understand as a moonlighter I will have to pay 15% social security tax on that income but when I read Andrew Schwartz's 2005 article this passage got my attention

"You're subject to an additional tax known as the "self-employment tax". When you work as an employee, your employer withholds social security and Medicare taxes from your pay at a rate of 7.65%, and then matches the taxes withheld. So the government gets 15.3 cents for every dollar you earn. When you're self-employed, you're required to report and pay that 15.3% tax, known as the self-employment tax, as part of your federal tax return. (Your self-employment tax rate goes down to 2.9% once your combined salary and net moonlighting income exceeds $87,900 in 2004 and $90,000 in 2005.)

Do I add my annual pretax salary with my pretax moonlight to get the income to reach the 97,500 (for 2007) and then does anything above that get taxed at 2.9% or does all of it get taxed at 2.9%...seems like a huge difference and well worth working the extra hours...?

Thank you,
Miriam

Zip Code: 02446

Each year, you only pay social security taxes up to a certain limit. You also pay Medicare taxes on all your earnings each year. There is no Medicare limit.

For 2007, once your combined social security wages and net self-employment earnings exceed $97,500, your self-employment tax rate decreases from 15.3% to 2.9%. However, only the income that exceeds the threshold of $97,500 (in 2007) will be taxed at 2.9%.

Let's say you earn $77,500 as an employee, and earn another $50k in net self-employment income. In this case, you will pay self-employment taxes of 15.3% on the first $20k of moonlighting income (since this brings you to $97,500), and then the remaining $30k will be subject to self-employment taxes of just 2.9%.

If you're married, you do NOT include your spouse's earnings in these calculations. For social security taxes and self-employment tax purposes, each spouse is treated separately.

Zip Code: 01801