Your specific case
$1,139.00 / 1.0765 = $1058.06
That's your taxable basis. There's also a way to do it with multiplication that is actually better due to rounding, etc. But this is the basic idea and is still an allowable way to do the calculation. This deducts out the employer share of Social Security and Medicare taxes, since the tax rate is charged minus those to match regular employment.
Your tax rate is 25% for income, 12.4% for Social Security, 2.9% Medicare. Note that Social Security and Medicare are both twice as large because you are paying the employer and employee shares.
$1058.06 * (.25 + .124 + .029) = $1058.06 * .403 = $426.40
So let's look at your refund again. It was actually reduced only $425 but should have been reduced $426.40. I'm not going to go through the actual forms to duplicate this, but it looks like rounding was your friend. You saved $1.40 in the real calculation.
The general case
It's easy to neglect the employer halves of Social Security and Medicare taxes, because if not self-employed, someone else (the employer) pays them. But they are hefty taxes and significantly increase the marginal tax rate if self-employed. Actual marginal rates:
- 10% pays 23.5%
- 15% pays 28.15%
You can calculate this by e.g.
(.25 + .153) / 1.0765 = .37436...
Somewhere along there, the tax rate changes. Social Security has a maximum cap, and Medicare has a surcharge. So the higher tax brackets will start using different formulas, adding 2.9% or 3.8% instead of 15.3%. And dividing by 1.0145 instead of 1.0765. This would be complicated to calculate because the Social Security cap would be based on your wife's income--you have a separate cap on your income. So you could hit the cap and she could still be below it. It's not pooled like income taxes.
- 25% pays 37.44% or 27.5%
- 28% pays 40.22% or 30.46%
- 33% pays 44.87% or 45.70% or 35.39% or 36.27%
- 35% pays 47.56% or 38.25%
- 39.6% pays 51.83% or 42.78%
In a situation similar to yours where one spouse makes only a small amount of income, the marginal rate could be as high as
(.396 + .153 + .009) / 1.0765 = .51834...
That's 51.83% in the 39.6% tax bracket. Such a spouse would be under the individual Social Security cap but above the family Medicare surcharge point. That's an extreme case though.