Is H&R Block's calculator estimating the tax incorrectly (too high)?

Question

I used H&R Block's tax calculator just to guesstimate (play around) with taxes and such.

I put $25000 in self-employed income, $7200 in expenses, $11000 in student-loan interest.

I came up with $6800 ($25000-$7200-$11000) as net income ($567 per month). H&R Block's calculator is telling me I would owe over $200 per month in taxes?!

I put in age 25, single, and no children, for year 2010.

Could anybody guide me what's going on?

Answer 1

Assuming I found the correct calculator, I ran the numbers you provided and also got a result of more than $200 per month .. $2584 to be exact. Upon inspecting the results (click the "Detailed Results" button), what stands out is the "Self-employment tax" of $2515.

Because you entered Self Employment income and not W-2 income, you're triggering the self-employment tax, which is designed to capture contributions to Social Security and Medicare. There is no employer making such payroll deductions and contributions on your behalf.

If you had W-2 income instead you, personally, would have paid half of the Social Security tax due and half of the Medicare tax due through payroll deductions, and your employer would pay the other half. In this W-2 context, the same contributions are commonly known as FICA taxes. Once you are self-employed, you end up paying both what you would have paid as an employee, and what the employer would have paid .. and they call the taxes self-employment taxes. But they're still just Social Security and Medicare taxes.

Also, the deduction for student interest would be limited to $2500 per year.

I would suggest the results you received are reasonable.

Answer 2

Looks to me like what's hurting you is the self-employment tax. See Wikipedia's explanation on this. 15.30% * 92.35% * (25000 - 7200) = $2515.06 which is what H&R Block shows for your self-employment tax.

I cannot tell if H&R Block should be deducting your student-loan interest or not. H&R Block is not using the student loan interest when calculating your self-employment tax; someone else can comment on whether or not they should.