Total Income tax and self-employment tax

I worked as a full time employee (W4 taxes were deducted by the employer) and I was self-employed (independent contractor - 1099MISC i.e. no taxes were deducted by the employer) for some months of the year.

For simplicity, let's say that I made $50k for FT position and$20k for self-employment position. Will I be taxed at $70k or will I taxes separately for$50k and separately for $20k? This is the first time I have worked as an independent contractor. So, I really don't know how this works. (The money I received from my self-employment gig was after Sept 15th so, I didn't have to pay the "quarterly taxes" or whatever they are called.) When it comes to my income tax, how will it be calculated? Does the money that I made from self-employment add into the total income during the year? • The final quarterly estimated tax payment is due in January, so you should check whether you need to make a payment then. If your withholding is greater than last year’s tax liability, you won’t need to. – prl Nov 13 '19 at 3:24 • If you continue to have both W-2 and 1099 income next year, you can increase withholding to avoid having to pay quarterly estimated tax. As long as the sum of your withholding and estimated tax payments exceeds 90% of your total tax, you won’t owe a penalty. – prl Nov 13 '19 at 3:26 • Don't forget though that your EXPENSES when you were RUNNING A BUSINESS (ie the "second part" of your year) will of course be very high. And those are deducted before anything. Be sure to get that right! – Fattie Nov 13 '19 at 17:58 • @prl: "As long as the sum of your withholding and estimated tax payments exceeds 90% of your total tax, you won’t owe a penalty." That's only true if you pay equal quarterly estimated tax payments through the year. But if you need to pay estimated taxes, you can't skip the first 3 quarterly payments and pay all estimated taxes in January -- that will still cause a penalty even if the sum is above 90% (unless you got a ton more income in the last quarter and you can show that the payments for each quarter meet 90% for the income up to that quarter using the annualized income installment method) – user102008 Nov 13 '19 at 18:00 2 Answers You will pay income tax based on your total income ($70,000 in your example, less deductions).

In addition, you will pay self-employment tax on the self-employment income. This is a separate tax, computed on Schedule SE, and added to your other taxes on form 1040. The self-employment tax rate is generally 15.3%. See schedule SE and its instructions for more information.

• Oh, man! I'm doomed. Thanks a lot for the information! – Raj Nov 13 '19 at 17:49
• @Raj: It's informative to add that the Self-Employment Tax is equivalent to the FICA tax (Social Security tax and Medicare tax) for employees. If you are a W2 employee, you pay half of the Social Security tax and Medicare tax (it is withheld from your paycheck) and the employer pays half (you don't see this on your paycheck; the employer can deduct their half as an expense). When you are self-employed, you are both the employee and employer, so you pay both halves, and you can similarly deduct half of it from your income. – user102008 Nov 13 '19 at 17:54
• @Raj It's very unlikely you made $20,000 give the example as stated. Your business took in$20,000. You would have had substantial expenses. Say there was $9,200 remaining after buying stuff / other costs. Your "self-employment income" is$9,200 in the example. On the 9,200 you will suffer the full ranges of taxes, such as "self-employment tax". – Fattie Nov 13 '19 at 18:00
• @Fattie, you’re right, of course, but you’re making an assumption that he has significant expenses. When I have worked as a software contractor, I had no expenses. – prl Nov 13 '19 at 22:01
• @prl, that's horrible !!!!!!!! surely you bought computers, TVs, phones etc? I'm sad now :/ – Fattie Nov 13 '19 at 23:49

You have two separate things going on here, income tax and self-employment tax.

Income tax will be paid on your total income, just as if it was all reported on a W2. (But you probably will have to pay something with your return, instead of getting a refund, and may need to make estimated tax payments if you continue with self employment next year.) You do have a number of possible deductions that will reduce the amount that's taxed: see the instructions for Schedule C and related forms.

Self-employment tax is in addition to income tax. It's essentially the same money that would be deducted from your pay* for FICA, Medicare, and so on. You compute this amount on Form 1040-SSE, and it's in addition to your income tax.

*Supposedly your employer pays half of that, but in reality they just deduct it from your pay before you ever see it.

• "Income tax will be paid on your total income" But it's incredibly important to realize that @Raj's $20,000 example IS NOT INCOME. A "self-employed" business is just the same as if you have formed an LLC or Corp, or, you are just operating "as you". You, of course, subtract expenses BEFORE you can state meaningfully the "20,000" figure Raj mentions. – Fattie Nov 13 '19 at 18:05 • @Fattie: Yes, I thought that I'd made that obvious when I mentioned that there would probably be deductions from that 20K that reduce the amount that's actually counted as income. Or perhaps profit would be a better word... – jamesqf Nov 14 '19 at 18:13 • One difference from W2: for a sole prop or other passthrough (partnership, S-corp non-wages, or LLC electing any of the preceding -- in short, anything but C-corp treatment), IF taxable income not more than$157.5k (\$315k joint), you can deduct 20% of the (net) 'Qualified Business Income' (not exceeding taxable ordinary income). This is new last year (2018) due to TCJA, intended to roughly match for small businesses the big rate reductions on C-corps. – dave_thompson_085 Nov 15 '19 at 4:46