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.