The $97,500 Ceiling

In computing your Self-Employment Contributions Act (SECA) tax, the Medicare (Hospital Insurance (HI)) portion of the tax is imposed at a rate 2.9% of all your net business income, with no upper limit.

The Social Security portion of the tax is imposed at a rate of 10.4 percent for 2011, but it only applies to the first $106,800 you earn in 2011 ($110,100 in 2012). The SECA tax combines both the employer and the employee portion of the social security tax. In 2011, there was a two percent reduction in the employee portion of the tax, from 6.2 to 4.2. This reduction is continued through February 29, 2011. At that time, the temporary reduction is schedule to expire and the employee portion will go back to 6.2 percent. If that happens, then the social security portion SECA rate will increase to 12.4.

For purpose of determining whether you meet the ceiling, only your own earnings - and not those of your spouse - are counted.

If you have earnings from a regular job, or perhaps more than one job, your employer will automatically withhold FICA tax from your wages. Your wages, salary, bonus, tips, etc. earned on the job will count toward the $106,800 amount, and at most your SECA tax will apply to the difference.

Overpayments of FICA tax. If you had more than one job during the year, and the total of all your income from those jobs added up to more than $106,800, you don't need to pay any SECA tax on your self-employment income. What's more, it's likely that too much Social Security tax has been withheld from your paychecks.

Take a look at the amount in Box 4 on all of your W-2 Forms. If you add them up and the sum is more than $$4,485.60 ($106,800 x 4.2 percent), you've paid too much tax. The overpayment (what you've paid minus the maximum dollar amount) can be claimed as a subtraction from your tax bill on Line 69 of Form 1040. You cannot use Form 1040EZ or Form 1040A to claim this overpayment.