If I Don’t Pay Self-Employment Tax, Do I Still Get the Deduction?

I wrote about my frustration with FICA (or, in my case, the “self-employment tax”) and some of my options for resisting it.

There was one technical complication I didn’t bring up. In short: if I stop paying FICA, can I still take the deduction for “One-half of self-employment tax” on line 27 of my 1040 Form?

This is important because my method of legal income tax resistance relies on the retirement savings tax credit, and my effective use of that credit requires that my adjusted gross income be below $15,000.

If my line-27 “One-half of self-employment tax” deduction were disallowed because I had refused to pay FICA then that would add to my adjusted gross income and potentially put me over the $15,000 line (if I hadn’t reduced my income to compensate for this).

The question is whether line 27 refers to the assessed amount of tax for the year, whether or not it has been paid, or whether FICA is kind of like a business expense or like an itemized deduction, in which case you can only deduct the expense if you actually paid it.

The “One-half of self-employment tax” deduction is not accounted for as a business expense on Schedule C, nor as an itemized deduction on Schedule A (the way deductions for state and local taxes are). Instead it gets its very own 1040 Form line-item. So the rules relating to business expenses or state & local tax deductions may or may not be helpful in answering this question.

The instructions accompanying the 1040 simply say to follow the instructions in Schedule SE, which do not address my question. Taken literally, these instructions would suggest that I am to take the deduction based on what Schedule SE says I owe, not based on what I actually pay. I don’t think I should take this interpretation as the last word, however.

I looked around on-line and finally sent out a few emails to some tax bloggers and to a war tax resister mailing list to try to find an answer. I ended up with several answers — thanks everybody! — but not much agreement on the right answer.

Two people pointed me in the direction of the Internal Revenue Code, where the applicable subsection is U.S.C. §26.A.1.B.Ⅵ.64(f)(1) — which reads (emphasis mine):

Section 1401 is the self-employment tax, what I’ve been calling FICA (in the case of self-employed people it’s really SECA, but amounts to pretty much the same thing).

The part of the code in which the above subsection appears is titled “Itemized Deductions for Individuals and Corporations” which may imply that this deduction is handled in a similar way to itemized deductions, even though it is an above-the-line deduction.

However, subsection 164(a), which covers the local taxes that can be itemized deductions, says “the following taxes shall be allowed as a deduction for the taxable year within which paid or accrued…” (emphasis mine). The fact that different language is used in subsection (f) above — “imposed” instead of “paid or accrued” — seems to indicate that there is a difference, that one does not need to actually pay or intend to pay the self-employment tax to take the deduction.

Two other sections of the tax code, U.S.C. §26.A.1.E.Ⅱ.461(a) and (f), read:

Here, “this subtitle” means the part of the code that governs the federal income tax in general, so this subsection would seem to cover all deductions and credits, including the line-27 deduction at issue here, and would seem to require that I would have to pay the self-employment tax (that is, I would have to actually “transfer[] money or other property to provide for the satisfaction of the asserted liability”) in order for the deduction to be “allowed for the taxable year of the transfer.”

So it looks like there are arguments for both sides that can be made from an amateur reading of the tax code. Is there any guidance to be found in legal rulings from the professionals?

In , the U.S. Tax Court decided the case of Barry Phillip Fiegel v. Commissioner of Internal Revenue. Fiegel was a “constitutionally challenged” tax protester who believed that he didn’t have a legal obligation to pay taxes because such taxes were “voluntary.” The court shot down that argument without much fuss, saying “petitioner is liable for self-employment tax for figured from self-employment income in the total amount of $10,491. See sec. 1401. Accordingly, petitioner is also entitled to a deduction in the amount of one-half of the self-employment tax, as stated by respondent in the notice of deficiency. See sec. 164(f)(1).”

So even though Fiegel didn’t pay his FICA in  — and in fact refused to even acknowledge that he owed it — he was able to retroactively apply the line-27 deduction to his taxes when that liability was imposed by the tax court in . In fact, the ruling seems to indicate that “respondent” — that is, the IRS — went to the effort of calculating this deduction for Fiegel at the same time as they informed him that he owed money for FICA.

Melinda D. Rivera v. Commissioner of Internal Revenue () has a similar note:

So it seems to be IRS policy, anyway, to treat the line-27 deduction as being based on the amount owed in a particular year rather than the amount actually paid in that year. Whether they are obligated by law to do so is another matter.

I’ll add updates here as I learn more.