I'm married, filing jointly. Our adjusted gross income was $80,000. That puts us in the 12% tax bracket (2022), however we ended up paying 24%. Is that difference due to the fact that we are both contractors and have to pay self employment tax? Also, it says our effective tax rate is only 5.98%. What does this mean, and how do I use that information?
If you are both self-employed you are both paying self-employment tax for Social Security and Medicare as well as ordinary income tax. Did you pay estimated quarterly tax throughout the year, or just wait to prepare your return and now owe a lot more than you expected to owe?
https://ttlc.intuit.com/community/self-employed/help/what-is-the-self-employment-tax/00/25922
https://ttlc.intuit.com/questions/2902389-why-am-i-paying-self-employment-tax
https://ttlc.intuit.com/questions/1901340-where-do-i-enter-schedule-c
https://ttlc.intuit.com/questions/3398950-what-self-employed-expenses-can-i-deduct
https://ttlc.intuit.com/questions/1901110-do-i-need-to-make-estimated-tax-payments-to-the-irs
https://turbotax.intuit.com/tax-tools/calculators/self-employed/
Yes, the self-employment income is what is increasing your taxes. You would be paying 15.3% SE taxes on top of your ordinary rate of 12%.
Your effective tax rate is your tax liability divided by your total taxable income.
We paid estimated taxes. I didn't get as much work last year, as the year before, so we actually ended up "getting" a little refund. I just did the math calculating my total taxes vs gross income, because TurboTax only tells you your effective rate, and realized what we actually paid in taxes was double what the tax bracket rate was. I knew our taxes were going to be more because of the self employment tax, but I never realized it actually doubles how much we pay in taxes. Makes me wonder if it would be worth both of us converting to LLCs
Self-employment tax is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners.
Employers calculate Social Security and Medicare taxes of most wage earners. However, you figure self-employment tax (SE tax) yourself using Schedule SE (Form 1040 or 1040-SR). Also, you can deduct the employer-equivalent portion of your SE tax in figuring your adjusted gross income. Wage earners cannot deduct Social Security and Medicare taxes.
The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).
You can deduct the employer-equivalent portion of your self-employment tax in figuring your adjusted gross income. This deduction only affects your income tax. It does not affect either your net earnings from self-employment or your self-employment tax.