If you haven't heard, last night, the Congress passed, and the President signed, legislation increasing your self-employment tax or your payroll tax, depending on your situation, by 2%.

You now must decide whether to pass this tax increase onto your students, absorb it, or split it somehow. For teachers who are salaried or wage employees, you're stuck, unless you can negotiate a raise to offset this tax increase.

This increase apparently goes into affect immediately, and for the later category of teachers, you should see the hit in your next pay statement. Self-employed teachers should plan accordingly to increase tax withholding.

From a guy living in Greece, where we've been hit by something like 25% raise in our taxes (AT LEAST) and more in side taxes (VAT, etc), I think that 2% is tiny enough to be absorbed!

I would hope that even if you have 40 students who pay a monthly fee of 100$, the lost 80$ per month is not crucial really (in a sense that it's less than 1 extra student in your studio more or less...).

But that's just me I guess...

Nikolas, I won't presume to tell others what to do in this situation, but $80/mo is actually $960 in a year, and that's not chump change for a teacher.

true, true...

But in my example if one has 40 students at 100$ each per month, he's making some 4000# a year x 12 = 48000$. I wouldn't mind an extra 2$ at that...

Of course as I said I'm taking it in as a Greek which means A LOT in this case and very much so I'm not presume to tell anyone what to do in this situation.

In fact I'm quite interested in this discussion, so I'm waiting for more people to chime in.

John, are you referring to the Social Security going from 4.2% to 6.2%? This was a bill that Obama pushed through early in his first term. Prior to that, SS tax was 6.2% for both employee and employer, and the bill lowered the ss tax for employees only to 4.2% for a period of time. That bill expired, and so as of 1/1/2013 it went back up to the original 6.2%. Of course, for self-employed individuals, they pay both the employee and employer portion, so it goes up from 10.4% for SS to 12.4% (total self-employment tax from 13.3% to 15.3%). Since it was what I was paying before when I was making less money, I have of course increased my rates since then so I won't be making an adjustment other than my normal rate increases.

Nikolas, your example isn't quite sound, as most teachers do not teach 52 weeks in a year's time. Usually in the states we take off at least 1 week for Christmas and 1 week for Spring Break (most students are unavailable during this time) and then a few weeks off in the summer, as we are lucky to even get to see students over the summer months for a few lessons. This cuts considerably into our yearly income. Personally, I don't know how I could manage 40 students, but we'll go with this example for argument's sake.

So let's say you get 44 weeks out of your students to teach:

40 x 100 x 10 months = $40,000. From that you deduct your expenses for being in business (rent, utilities, depreciation for instruments, maintenance for instruments and repairs, education expenses, supplies, dues and subscriptions, insurance, etc.). If you are good about bookkeeping all these things, you might be able to get your adjusted gross income down to anywhere from $20,000 (in the case where you're paying monthly rent for your space, this is quite conceivable) to $28,000.

Then from that take 15.3%: $28,000 x .153 = $4284. This is what you have to pay in self-employment tax. What it would have been in 2012 and previous years: $28,000 x .133 = $3724. For the same money earned that's an extra $560 you have to pay in. Not earth-shattering, but nothing to sneeze at. Especially when you consider that this is just to cover Social Security and Medicare, two things that most of us will never see when it comes our turn to retire. I don't believe in retirement, but I still don't want to be giving money away for something I'll never get back. Of course, there's the regular federal taxes on top of that, and state if you have them.

If you're a serious teacher, teaching as a business, with most if not all of your income derived from teaching, then financial planning is crucial. Many, many businesses work with only a 2% or 3% margin. Fortunately, we don't fall into this category. Anyway, I posted this topic not to start a political discussion, but to remind teachers who fall into this category that we're being hit with some news taxes this year and to plan accordingly.

This morning, the news had a small feature on the shrinkage of Medical Savings Accounts, or MSIs. Previously, you could place up to $4,000 pre-tax dollars into this account to save for and pay for out of pocket medical expenses. The new rate, effective 1/1/13 is only $2,500 per year. This $1,500 drop translates for most of us into an additional Federal tax of $500. I don't anticipate our medical expenses will shrink any time soon.

In my case, a two earner family, we elected to fund the MSI out of my wife's income, so it doesn't directly hit the studio income, but it does result in $500 less family income.

John v.,

When the reduction in the social security tax went into effect 2 years ago I presume you passed along this decrease to your students. In that event I think your students would likely agree that your rates should go up by 2 percent now that this reduction expired.

I'm not a US teacher (as you all may know) but I'm deeply affected by taxes and the economy right now!

I will just say that because of the crisis, not only I haven't raised my rates (as I was talking about a couple of years ago), but I'm struggling to keep my students and have lowered my rates to ridiculous levels.

As a side note I will mention that the government and Germany insist that we should like this, but I think that this is killing anything alive left in Greece! :'(

John, did you pass along the break in taxes we got 2 years ago? This is not a new tax, it's the ending of a tax reduction we got due to a stimulus plan in December of 2010. At least that is how I see it.

So with that said, no, I won't be passing along this tax hike to my students, at least until my rates change as they normally do in August.

Generally speaking, when you get extra revenue, it's not a problem. What is a problem, or can become a problem, is when your business faces increasing costs of operations (or you personally). If you started teaching two years ago, this is a new tax for you. If you didn't raise rates last year or the year before (my situation), then you're facing a lower income now and may want to consider tuition adjustments.

As a business owner, it's probably best to look at things as rationally as you can, and unemotionally, evaluate expenses, costs of operations, etc. You have to look at the market and try to determine what the market is for your product, what price points will deliver what volume, and set prices sufficiently to offset all costs, including employee income (that's you) and to leave you a small operating cushion (profit).