20

This year is my first year in the USA. My sole earnings were an honorarium from a university for $7,500 -- reported on a 1099-MISC form in box 7.

For this, I was on-site for a few days and talked about my particular technical expertise with university staff, and joined them in a publication.

However, as I have just been unpleasantly informed by turbotax, this does not make me a poor person earning under the $12k deductible. This makes me a self-employed business and thus I have to pay about 15% taxes on these earnings.

This seems completely crazy. Have I missed something?

A-Foreign-Scientist-2018
  • 201
  • 2
  • 4
  • 8
    As your user name says "A Foreign Scientist", check your visa against this list. There is a paragraph that develops this statement "A NONRESIDENT ALIEN is not liable for the self-employment tax." https://www.irs.gov/individuals/international-taxpayers/alien-liability-for-social-security-and-medicare-taxes-of-foreign-teachers-foreign-researchers-and-other-foreign-professionals – user662852 Mar 21 '19 at 16:13
  • 1
    Thanks -- I have an I-765 EAD and therefore I am a resident alien. – A-Foreign-Scientist-2018 Mar 21 '19 at 16:38
  • 15
    You will need to verify whether you are a non-resident for tax purposes - this is different from immigration definition. If you are a NR for tax, you cannot use Turbotax, as it does not offer support for this - find software that support form 1040NR (non resident). – Najel Mar 21 '19 at 16:59
  • 1
    @Davislor - the urban legend is about income tax, not just any random duty on a gallon of gas. – Davor Mar 21 '19 at 22:43
  • @Davor Seems my comment was removed. I’ll respect that. I note that nobody who repeats that talking-point ever puts it in context. Bailey: “That’s technically true only of one kind of tax, only because most of the money most taxpayers send to the IRS every year technically counts as another kind of tax. Also, 47% was only true at the bottom of the worst recession in seventy years.” Motte: “Half of Americans pay no taxes!” – Davislor Mar 22 '19 at 08:05
  • @Davor And it’s not as if other kind of taxes are an afterthought. In 2010, the year the statistic came from, the IRS collected more in payroll tax than in income tax. Most billionaires with good tax lawyers pay less than the 15% in this real-world case, which is not technically “income tax.” The myth really needs to die. – Davislor Mar 22 '19 at 08:22
  • Welcome to America. – Konstantin Gerasimov Mar 22 '19 at 20:57

2 Answers2

32

The 15% you're seeing is self-employment tax. The standard deduction still applies, and you are not paying any federal income tax. Self-employment tax pays for social security and medicare, normally employees and employers split those, the self-employed pay the full 15.3% themselves.

Self-employment tax is based on the business net profit, so any business expenses associated with this income can be used to offset income and reduce the tax liability. If you had to fly in and stay at a hotel, for example, those costs should be factored in.

In some cases, honoraria is mis-classified as Nonemployee Compensation (Box 7) instead of Other Income (Box 3). Which box is appropriate depends on the nature of your engagement, Other Income would typically not be subjected to self employment tax.

Edit: I was remembering common mis-classification issues at universities with fellowship income, not honoraria. Honoraria is sometimes mis-classified, but in your case I would guess Box 7 is proper, but could still be worth looking into further.

Hart CO
  • 70,420
  • 9
  • 171
  • 214
  • From my understanding, whilst this was all science and research stuff, I DID provide a 'service' as the IRS understands it and I can't safely claim this as a scholarship. – A-Foreign-Scientist-2018 Mar 21 '19 at 16:41
  • 14
    Yes. If you were a poor person earning that amount in W2 wages, you'd have had the ~15% taken out before you even got your paycheck. – jamesqf Mar 21 '19 at 17:11
  • 2
    @jamesqf And that tax, at least for medicare, stops at around 80k. i.e. People with higher incomes actually pay a smaller rate than those earning a lower income. Welcome to America! – paulj Mar 21 '19 at 17:36
  • 9
    @paulj: Your memory is a bit lacking. The social security tax (larger portion of FICA stops), but not at 80k, more like 128k or 130k, The medicare portion doesn't stop, and in fact goes up (see "Additional Medicate Tax"; that threshold for that to kick in is typically 200k). – Ben Voigt Mar 21 '19 at 17:46
  • @BenVoigt Indeed. I lost interest many many years ago about such inequities. Thanks – paulj Mar 21 '19 at 17:57
  • @jamesqf If you were paid W2, the company would pay half of that 15%, and only the remaining half would be deducted from your paycheck. – GalacticCowboy Mar 21 '19 at 18:56
  • 5
    @GalacticCowboy: Yes, that half won't appear on a W2 or paycheck in any shape or form, it's already been taken out (as jamesqf said). The other half does appear as social security and medicare withholding. It's all a government scam to make you think social security and medicare are only costing you half as much as actually is being taken. – Ben Voigt Mar 21 '19 at 19:52
  • @BenVoigt I was pointing out that his wording implies the full 15% is deducted from the paycheck. – GalacticCowboy Mar 21 '19 at 20:18
  • 5
    @paulj Social security is a net progressive tax because the benefits received climb slower than the tax paid. That is, you buy insurance for yourself, and you pay a progressive tax to subsidize insurance for people with lower incomes. The benefits hit a cap, which is why the tax also is capped. – user71659 Mar 21 '19 at 20:35
  • 2
    @GalacticCowboy: It is, because all of it is a cost of employing the person. But only half of it counts toward one's "total compensation". That's true for self-employed as well, the "employer share" FICA taxes that they have to pay are excluded from gross income. – Ben Voigt Mar 22 '19 at 00:15
  • @paulj: It helps if you think of the SS tax as not being a tax, but an (involuntary) contribution to a 401(k) plan that will eventually pay you an annuity for life, based on how much you've paid in. As such, it depends for its financial health on a lot of people dying before they've recieved more in benefits than they paid in. So if you have a relative few high-income people paying a fixed percetage into the system, expecting high benefits in reture, and they all live long & healthy lives, you bankrupt the system. – jamesqf Mar 22 '19 at 05:52
  • @BenVoigt: the SS cap was $80,400 for 2001, $128,400 for last year, and is $132,900 this year. That's inflation for you. – dave_thompson_085 Mar 22 '19 at 14:40
  • @GalacticCowboy: "The company pays half" is simply a lie told to make SS more palatable to the hard-of-thinking. Obviously, if the company wasn't paying that part of your wages before you even see them, you would be paid more. So if you made $10K with the "paid by employer" tax, you would make $10,750 without. – jamesqf Mar 22 '19 at 18:13
  • 1
    @jamesqf I'm not convinced that employers would all increase wages if they had to pay less into SS. But yes, it is a hidden cost of employing people, so maybe it drives down wages or how many people they're willing to hire to some extent. – Kat Mar 22 '19 at 21:24
  • @Kat: Not automatically, of course, since employers have a motivation to reduce their costs. But over time,that's where the market would drive wages. – jamesqf Mar 24 '19 at 16:10
12

Self-employment tax is basically you covering the medicare and social security "tax" that would have been covered by your employer if you were on their payroll. The standard deduction is for income tax that you should not be subject to. It does not apply to self-employment tax.

Note that if you were an employee, you still would have paid half of that amount (7.65%) in the form of withholdings from your paycheck.

Brythan
  • 20,968
  • 6
  • 53
  • 67
D Stanley
  • 133,791
  • 19
  • 313
  • 372
  • 6
    If you were an employee, I'm pretty sure you would have paid exactly the same, no matter how it's phrased. We have the same system here, "half paid by employer, half by employee", and that always works out to the employee paying all of it. By nature, it's not a tax on the business, but a tax that takes some of what the company spends on the employee away from the employee. – Nobody Mar 21 '19 at 20:14
  • 2
    @Nobody Then your system is wrong. Employers are required to pay half of the medicare and social security tax and withhold the other half. – D Stanley Mar 21 '19 at 20:43
  • 2
    And your employer would’ve picked up the other half, which is why a self-employed worker pays twice as much. – Davislor Mar 21 '19 at 20:50
  • 6
    No, you misunderstand. Saying that the employer pays a part is just a book keeping trick. For both the employer and the employee, it's like the employee pays both parts. The employer only cares about total cost for the employee. The employee only cares about what they actually get to spend. The difference is the tax, no matter how you "divide" it between them both. – Nobody Mar 21 '19 at 21:30
  • 3
    @Nobody Not true. If an employer pays an employee $100 gross, their total cost is $107.60 - the salary plus their portion of FICA/MC. If they pay a contractor $100, their total cost is $100. The government gets $15 either way. – D Stanley Mar 21 '19 at 21:36
  • 5
    @DStanley See https://en.wikipedia.org/wiki/Tax_incidence "The key concept is that the tax incidence or tax burden does not depend on where the revenue is collected, but on the price elasticity of demand and price elasticity of supply.
    [...] some economists think that the worker bears almost the entire burden of the tax because the employer passes the tax on in the form of lower wages. The tax incidence is thus said to fall on the employee."     – Acccumulation Mar 21 '19 at 21:51
  • @Acccumulation I would argue that the employer will pay whatever the employee is willing to take - the employee doesn't care that the employer also pays tax. But we've strayed from the original question... – D Stanley Mar 21 '19 at 22:00
  • 3
    @DStanley And that's one of the reasons why a contractor charges more than you'd typically pay an employee doing the same work. – Dmitry Grigoryev Mar 22 '19 at 12:35
  • 1
    The employer pays X. The employee gets X * (1-T). You can say the employer pays the tax, or that the employee pays the tax, but what matters is that the government takes that cut, and the employee doesn't get it. In the case of "employer matching", we pretend to give the employee half of the tax, then take it back. But if the employer were to include the "match" on the top line of the pay stub, and then deduct twice as much, it would be exactly the same. – Monty Harder Mar 22 '19 at 20:14