I was reading through some past threads on this. It sounds like Don Bright was saying that retail traders pay FICA (Social Security/Medicare) taxes, but traders with pro firms do not. Is this correct? According to Tresser's book, you don't pay this tax unless you own or rent a seat on the exchange.
Don is correct. Retail traders are required to pay FICA. Proprietary traders are usually class B members of a Limited Liability Company, classified under the IRS Code as daytraders and exempt from FICA.
Then how come you can follow all the instructions on your 1040 and Schedule D to the letter without paying FICA? In other words, How am I supposed to know?
How can that be? FICA from a retail trader would have to come from the "Self Employment" tax, which requires one to declare self-employment, which I don't think traders need to do. Dunno for sure though. Also, be advised that if retailers need to pay, they pay freaken' double! You see, Joe Sixpack who works at the docks gets a paycheck, and SS and medicaid deduct their chunk from it (and he sees it on the numbers on his paystub). What he doesn't see is the employer paying the same amount in addition to what is deducted from his check. So, as a Self Employer, you get the regular deduction from your pay, then also get to pay the Employer's part. And, (to add insult to injury) there is no cap on employer "contributions". If Joe makes more than about 80k (not sure on the exact figure), he stops making SS and medicaid "contributions", but his employer still gets to pay out their "contributions".
Let me clarify. I am presuming the retail trader is treating his trading activities as a business, classified as a sole proprietor and such is filing schedule C and is filing a profit or loss from the business and deducting business expenses such as computer, software, educational workshops, trading subscriptions, etc. or has even incorporated under sub-chapter S for example. In those cases, FICA is required.
From the IRS website: Self-employment tax. Gains and losses from selling securities as part of a trading business are not subject to self-employment tax. http://www.irs.gov/formspubs/page/0,,id=12278,00.html This same language is also found in Publication 550 (http://www.irs.gov/formspubs/page/0,,id=12278,00.html), page 68.