California Doesn’t Conform on Self-Employment Tax Deduction Change

Yet another California non-conformity issue has reared its head. Those of us who are self-employed must pay self-employment tax on their self-employment earnings. The self-employed get to deduct 50% of that on line 27 of Form 1040.

In 2011 the self-employment tax changed from 15.3% to 13.3% on the first $106,800. However, the deduction is still based on 15.3% rather than 13.3%. So let’s say I paid $1,000 in self-employment tax; my deduction is $575, not $500. A little extra benefit…except on your California return.

For California purposes, the deduction is $500, not $575–it remains at 50% of the amount paid in self-employment tax. I noticed this with one of my California clients and called the FTB to verify this. The California legislature did not pass conforming legislation. Those of you who are self-employed Californians will see an adjustment on Schedule CA of your Form 540.

This was noted in today’s San Francisco Chronicle
. The Chronicle also noted that TurboTax hadn’t updated its software until last Friday. Apparently, the Franchise Tax Board forgot this adjustment until after the tax forms were initially generated.

Those of you who have filed returns with “material” changes will likely get notices noting the adjustment and proposing an additional amount of tax to pay.

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2 Responses to “California Doesn’t Conform on Self-Employment Tax Deduction Change”

  1. EVAN APPELMAN says:

    I believe the FTB has grossly overstepped its authority here. They have taken a totally unsustainable position. There is NO CHANGE in the SE tax deduction. It remains at the employer’s share of SE tax — 7.65% of income subject to SE tax up to the social security taxable limit, and 1.45% for anything beyond that. Only the method of calculation has had to change, because of the reduction in the EMPLOYEE’S share of SE tax. Thus there is nothing new to which to conform or not to conform. It is the FTB that has, by administrative fiat, abrogated the state’s conformance to the deduction. I do not believe they have that authority. They have, in effect, imposed a new stealth tax on self-employment income, on their own authority, in the middle of a busy tax season, by bullying the software companies into incorporating a new adjustment.Their behavior ill becomes the taxing authority of the world’s ninth largest economy.

    Evan Appelman, Enrolled Agent
    224 Lake Drive
    Kensington, CA 94708
    Tel.: (510) 526-8449/Fax: (866) 549-4649

    • Russ says:

      You’ll have to take them to court…after appealing through the FTB, and then the Board of Equalization. While I tend to agree with you, I suspect we’ll hear next about this in seven years.

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