Research Report Costly Error in Payroll Tax Computation for the Self-Employed
James R. Nunns
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Errors in the formulas for computing payroll tax for the self-employed result in their paying less payroll taxes than workers with the same earnings. All self-employed workers benefit from these errors, but those with high earnings benefit disproportionately. A provision in Ways and Means Committee chair Dave Camps tax reform proposal would correct the formulas. The $5 billion revenue gain over ten years from enacting this provision could help pay for extending expiring tax provisions or for better targeted tax cuts. And it would eliminate a glaring inequity. This article explains the correct formulas and the effects of applying them.
Research Areas Taxes and budgets
Policy Centers Urban-Brookings Tax Policy Center