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I'm trying to calculate the federal taxes I would pay on self employment (sole proprietor -- pass through) income. I found this online tax calculator -- https://www.taxact.com/tools/self-employed-calculator , but I'm confused by its results. When I enter

100000

as my net income, it lists the taxes I would pay as 14130, or 14.13%. From what I read on another web site -- https://obliviousinvestor.com/how-to-calculate-self-employment-tax/, it said the rate I should pay would normally be 15.3% (social security at 12.4% and Medicare at 2.9%). So I'm wondering how I'm missing 1%.

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3 Answers 3

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Half of the amount is deductible to the business as a business expense. So first you adjust the business income number to reflect deduction.

Adjust the business income:

1 - (0.124/2) - (0.029/2) = 0.9235

$100,000 * 0.9235 = $92,350

Then you calculate the tax:

$92,350 * 0.124 = $11,451.40
$92,350 * 0.029 = $ 2,678.15
Total             $14,129.55
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  • I think it should be 100000 / (1 + .061 + .0145) not 100000 * (1 - .061 - .0145)
    – Ben Voigt
    Apr 13, 2019 at 1:31
  • It's not. Why do you think it should be?
    – quid
    Apr 14, 2019 at 16:03
  • @BenVoigt+ that would be correct arithmetically, but Schedule SE uses the (1-fraction) method, probably because it dates to like the 1950s when people did these calculations by hand. This gives SE a tiny benefit (about 50 basis points), but on the other side SECA includes health insurance whereas FICA excludes it.
    – dave_thompson_085
    Apr 14, 2019 at 18:42
  • @quid: Because the self-employment income is business take - employer share of tax. Employer share of tax is taxrate * self-employment income, not taxrate * business take. So you have (business take = self-employment income * (1 + taxrate)) and when you solve that you get (self-employment income = business take / (1 + taxrate))
    – Ben Voigt
    Apr 14, 2019 at 21:25
  • irs.gov/taxtopics/tc554. Guidelines say you adjust actual income down, not up. Your suggestion would have SE tax taken from 107. 65% of income.
    – quid
    Apr 15, 2019 at 6:01
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If you were employed and making $100,000 you would have to pay 7.65%, or $7,650, and the employer would also have to contribute $7,650. That means that the total amount of money your employer would be paying would be $107,650, while you would be receiving only $92,350 after the tax is withheld ($100,000 minus $7,650). The $15,300 total tax is 15.3% of the $100,000, but it's only 14.2% of the $107,650.

The reason it comes out to 14.2%, lower than the 15.3% you would get if you were to naively add the 7.65% for individual contribution to the 7.65% for employer contribution, is that there's several different ways of calculating taxes at play. When you are charged $7,650, that's calculated as a percentage of your total pay of $100,000. But of that $100,000, $7,650 is taxes. So you're in a way, you're being taxed on your taxes. The $7,650 that your employer contributes, however, is based on only the $100,000 that they're paying you. They aren't charged taxes on the full $107,650 that they're actually paying. So while the two contributions are both expressed as being 7.65%, in reality there's a significant difference between them. Of the money your employer is paying to employ you, only 7.1% of it is going to taxes, while 7.65% of what you receive is going to taxes.

So if we were to calculate what the tax on $100,000 of self-employment income would be equivalent to the tax on employment income, one way to do that is to figure out what take-home pay would be equivalent to having a total employer payment of $100,000. That is, if the employer's contribution of 7.65% of the take home pay, plus the take home pay, is $100,000, then what is the take-home pay? This can be solved with algebra as

take_home + take_home*.0765 = $100,000
1*take_home + take_home*.0765 = $100,000
(1+.0765)*take_home = $100,000
take_home = $100,000/1.0765 = $92,893.64

However, the people designing the tax code apparently decided this was too complicated. So instead of asking "what take home would we have such that 7.65% of the take home pay plus the take home pay is $100,000?", they ask "what would take home be after we take off 7.65% of the total?" Note that in the first version, we're subtracting off 7.65% of the take-home pay. That is, I calculated that the take-home pay is $92,893.64, and 7.65% of that is $7,106.36, and when we add that back to the $92,893.64, we get $100,000. But in the second version, they're taking away 7.65% of not the take-home pay, but the $100,000. So instead of taking away 7.65% of the $92,893.64, they're taking away 7.65% of the $100,000. This means that your taxable income is lower, which reduces your tax rate even further. So instead of the 14.2% rate I calculated earlier, your tax rate is only 14.1%.

So, I think the take-away here is that you shouldn't ask question about tax calculations unless you're prepared for a long, complicated math-filled answer.

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(Assume you meant in the USA)

I don't know, I'd advise you to look at the IRS guidelines.
Neither of those sites is "official".

If you are actually expecting anywhere near that amount of income from self employment you'll need to learn about quarterly withholding pretty soon. (Can't remember if you get a pass in the first year or not)

If I were expecting to make above $15k of self employment income I'd hire someone to advise me for a few hundred dollars to keep out of the IRS's cross hairs.

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