I worked as a consultant for a short period and was paid a lump sum that covered. My wages, per diem, and air fare. There were no taxes taken out, as I am responsible to file Estimated Taxes. Is Per Diem and my air fare subject to Social Security Taxes. I was under the impression that only earned wages were subject to sst. Per Diem is an allowance for all living expenses. I would expect that not to be subject to SST but is subject to Federal withholding taxes. I am confused.

Mike:

Your being paid as an independent contractor, which means the lump sum income you cite will be reported on Schedule C.

You will also report the expenses incurred as a consultant, to include your airfare, hotel, meals incidental travel expenses, etc.

As an independent contractor, you will pay self-employment (SE) tax, which, at 15.3%, is exactly TWICE the rate you pay when you pay Social Security and Medicare taxes as an employee (because you are paying BOTH the employee and the employer share of the Social Security and Medicare taxes).

However, the SE tax is paid on your NET income, which is lump sum payment MINUS all the expenses noted.

BOTTOM LINE: You will not pay the SE tax on the air fare and per diem, because the deductible expenses will offset those payments.

If you still find this confusing, suggest you use an experienced tax professional to prepare your 2008 tax return. It will keep you out of trouble, and it is likely that the tax pro's expertise will save you enough in taxes to more than cover his fees.