FAFSA Last Minute Q: Self-WEmployment Tax

Parents Forum
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<p>I don’t know what your school did, so I can’t comment on that. I just know how the FAFSA formula works. </p>

<p>Again, the reason they ask for earned income from both spouses is because the formula calculates the FICA for each and subtracts that out. </p>

<p>Self employment tax is 2X FICA – so the 50% deduction from income works to subtract the rest out.</p>

<p>So let’s say hypothetically a person pays $10,000 SE tax.</p>

<p>The amount they report as earned income allows the formula to derive $5000, which is subtracted out from AGI.</p>

<p>Their AGI is calculated after subtracting out the other $5000.</p>

<p>So the full $10K is subtracted out. </p>

<p>You can see the whole formula here:
<a href=“http://www.ifap.ed.gov/efcformulaguide/attachments/101310EFCFormulaGuide1112.pdf[/url]”>http://www.ifap.ed.gov/efcformulaguide/attachments/101310EFCFormulaGuide1112.pdf&lt;/a&gt;&lt;/p&gt;

<p>Look at worksheet A. They derive “total income” by using the AGI (item #1) to provide the “taxable income” in item #3, and adding in untaxed income - item #4. Then the Social Security tax allowance is subtracted out (based on table A2) in lines 10 & 11. </p>

<p>If your college had a copy of your tax returns when making the correction, then it’s possible that they were correcting for an error made in FAFSA entry – if you entered “total income” rather than AGI in the FAFSA, then they would correct for that by entering AGI instead. It can be confusing precisely because the AGI figure is often below the total of the earned income, so I can see how many people probably get confused by that. </p>

<p>Of course it is also possible that your college made an error, or that they exercised professional judgment in you favor based on the overall situation, leaving you with the impression that it was because of the SE tax.</p>

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<p>I just want to make it clear – I am not trying to debate over what one college did. College financial aid offices have a lot of leeway in what they can do in the exercise of “professional judgment” – and since there is no space on the worksheet for a “professional judgment deduction” – they will invariably tack on the figures in another field.</p>

<p>I just want to make this clear for others parents, so you can see how the FAFSA worksheet works and don’t spend undue time focusing on issues that don’t really apply. Keep in mind that employed people have money taken out of their pay checks for FICA, but pay taxes on their gross earnings – not the net after FICA – so they, too, are paying more money out in taxes than what is reflected as “income tax” on their tax return. </p>

<p>I think it feels bad because we self-employed people are very aware of making those quarterly deposits. It seems that we are paying a lot in taxes, and it often turns out that the big amount we are paying is mostly self-employment tax rather than income tax. So when it comes around to filing FAFSA, and we know we’ve paid out, say, $12,000 to IRS over the previous year, and somehow or other we end up having to enter some trivial amount – say $200 - in the field on the form for “taxes” paid… we feel like something is is missing somehow. We’re thinking, whoa, I paid a LOT more than $200 … where do I get credit for that? But once you look at the worksheet… it’s easier to see. It’s there - it’s just not spelled out as an extra field on the form.</p>