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If you're in the 25% tax bracket and work as a W2 employee, but do a side job and receive a 1099-MISC, what is the expected federal tax to be paid on that amount?

I use TurboTax, and entered in all W2 information. I waited until the end before entering in the 1099-MISC. About 46% of the income from the 1099-MISC was immediately subtracted from the Federal tax return. Is that standard to pay almost 50% taxes on 1099-MISC earnings?

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You now see the downside of 1099 earnings. Make sure you take advantage of the upsides: deducting business expenses including use of your home and car where applicable, solo 401(k) or SEP IRA options, employing your family members, etc. – farnsy Feb 18 at 4:13
up vote 8 down vote accepted

You will pay at your top marginal rate in general, but there are a couple of other factors that may add to the tax:

  1. This additional income may bump you into the next tax bracket, in which case you'll pay a higher marginal rate on the portion that falls into that next higher bracket.
  2. You probably have to pay self-employment tax in addition, which will mean "both halves" of your social security and medicare. (For people with "regular" jobs getting a W-2, the employer pays SS and Medicare as a payroll tax in addition to what they withhold from your paycheck.)
  3. If you're sufficiently underpaid on your tax, then you may have to pay some interest in addition to just the tax.

Without knowing too much about your situation, 46% doesn't sound crazy since you said you're in the 25% bracket and the combined rate for SS and Medicare is 15.3%, which already puts you around 40.3% just based on my bullet #2 above.

Your software should have generated Schedule C on your return. You should be able to track some of these numbers more precisely there.

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+1 for point 2. It's mostly though not entirely explained by having to pay both halves of SS and Medicare. And not just owing both halves (as opposed to one half for the W-2 employee) but paying them at the time of filing taxes (as opposed to having the employee half withheld each paycheck). – stannius Feb 19 at 15:31

In addition to what Brick notes - particularly, the 15.3% that goes to FICA/Medicare - if you're in the 25% bracket before your 1099 income hits, so > $75,600 this year for Married Filing Jointly, you're also in the area where you start losing deductions and credits.

For example, if your combined income were $95,000 before your 1099, and then you earned $20,000 in 1099 income, you're now at $115,000, which is $5000 over the phaseout for the Child Tax Credit begins. You would have a reduction of .05*5000=$250 to your Child Tax Credit (and thus to your refund). You're now at 41.5% tax on that amount - and if your pre-1099 income was $110,000 on the dot, it would be 45.3%, based solely on this.

Other tax credits or deductions have income limits as well and may reduce your ability to take them; the IRA deduction, many education credits, and AMT exemptions all fall in the 25% bracket. Your marginal income tax rate may well be significantly higher than 25% around the $100k-$160k area depending on your circumstances.

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For a time, I called that phenomenon "The Phantom Tax Rate Menace" but it never caught on. My favorite is when an otherwise 15% retiree sees a 46.25% hit due to taxation of social security. – JoeTaxpayer Feb 18 at 0:42

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