Blended Tax Rate Higher than Expected

[ashley0259]

Hello,

I am trying to understand why my Blended Tax rate is 22% instead of 10%. I thought that tax rates go off of your taxable income (after deductions). Even at that, if it were based on my total income before deductions, it isn't high enough for the 22% bracket. I am filing Single, no dependents with Turbo Tax Online Self Employed

• Total Income : $16,698 broken down into self employment ($1,448) and Other ( Grants/Scholarships not used for school expenses $15,250)
• Total Deductions: $14,972
• Total Taxable Income: $1,726
• Blended Tax Rate: 22%

These are the 2024 tax rates for single filers

10%	$0 to $11,600
12%	$11,601 to $47,150
22%	$47,151 to $100,525

The only thing I can figure is I am being taxed 10% on my Self Employment income and 12% on my Other income BEFORE deductions since those numbers fall within different tax brackets.

Am I misunderstanding something? Any explanations are helpful, thank you!

[DaveF1006]

Yes, there is the self-employment tax to consider on $1448 self-employed income. The self employment tax is computed as follows. ($1448)(.153).9235)=$205. Your tax based on your income is ($1726)(.10)=$173. These are ball park figures.

Now your total tax liability is $205 + $173 = $378  After applying the credit, your Tx Due is $277. I  know this differs from Turbo Tax by $1 and this may be attributed to a rounding difference.

[lpalav]

Hi, I have a similar issue. It does not make sense. 32% tax rate on an income of $40K, how did the logic get inverted? I am sure the IRS did not intend to tax lower income folks with higher rates, as their tables clearly show.  My question is, is this a software algorithm issue in Turbotax, and what can be done to get it to the right calculations? Thanks

[ThomasM125]

There is not a software algorithm issue with TurboTax.

If your self-employment income is $40,000 your self employment tax would be about 15% of that. After you deduct your standard deduction of $16,400, assuming you are single, the difference would be your taxable income on which your income tax rate of 10 - 12% would be assessed. Since the 15% was assessed on your net self-employment income before your personal deductions, it would be much more than 15% when compared to your net taxable income. So, 15% plus 12% plus taking into consideration the fact that the 15% will be much more when you factor in personal deductions, could easily get you to the 32% you mention. 

Also, the self-employment tax is not an income tax, it goes to your social security retirement fund. So, it is not accounted for in the income tax rate schedules.

@Ipalav

[lpalav]

Thanks Thomas. So the "plus" happens mainly because one cut goes towards social security, and the other cut goes towards income tax.

[ThomasM125]

Yes, you pay the social security/ self-employment tax on your personal tax return when you are self-employed, but it is not an income tax. So, when determining your tax rate you need to take that into consideration.