Confusion at Tax Paid Percentage

[KD416]

Hi, I have two income sources, as a 1099 contractor and as a W-2 employee, but on a limited basis (event/seasonal work). My tax bill was larger than I expected, amounting to about 20% of my AGI. Why is this so high? I make less than $40,000. Thank you.

[Cindy4]

Being a 1099 contractor means you are self-employed by IRS definition.  You pay 15.3% FICA tax - Social Security and Medicare - in addition to income tax.  You only pay 7.65% FICA as an employee because your employer covers the other half, and that is automatically withheld from each paycheck, so you don't really notice it.  We have some great resources here at our Self-Employment Tax Hub that may help you going forward.  You can either start paying quarterly estimated taxes based on your projected profit, or you can adjust your W-2 withholding to cover the additional tax burden.  

As an example:  If you have $20,000 profit for the year your self-employment tax would be calculated on schedule SE as 20,000 x .9235 = 18,470 x .153 =  2,825.91 plus your overall income tax rate, this will be based on your overall taxable income.  So if it's, say, 12%, 20,000 x .12 = 2,400.  The total tax generated by the self-employed income would be $5,225.91.  This is only on the self-employment income, not the W-2 income.

@KD416  Many people are caught off guard by this when they start side jobs.

Hope this helps!

Cindy

[KD416]

Thank you, Cindy. I have one more follow up. The bulk of my earnings are from the 1099 contractor role. Does this impact my income tax rate?

[RSUMan]

The short answer is no.  Your income tax rates are not affected by the fact that you get paid as a 1099 contractor.  Income tax is imposed on Taxable Income.  So regardless if you start with W-2 wages or Form 1099 payments, you arrive at Taxable Income and then the tax rates are the same.
What surprises many 1099 contarctors is the Self Employment tax burden which was described above.

[KD416]

Ok, thank you Cindy. I was surprised, because I did pay estimated taxes throughout the year, but by the end my total tax burden was 20%, when I expected to pay 15%.

Thank you for your assistance.

[VolvoGirl]

You owe 2 taxes on it.   You owe regular income tax on all your income (including the Net Profit on Schedule C for your 1099 contractor income).  Then you also owe Self Employment tax.

Self Employment tax (Scheduled SE) is automatically generated if a person has $400 or more of net profit from self-employment. You pay 15.3% SE tax on 92.35% of your Net Profit (If it is greater than $400). The 15.3% self employed SE Tax is to pay both the employer part and employee part of Social Security and Medicare (FICA). So you get social security credit for it when you retire. It is in addition to any regular income tax you owe on it.

The SE tax is already included in your tax due or reduced your refund. It is on the 1040 Schedule 2 line 4 which goes to 1040 line 23. The SE tax is in addition to your regular income tax on the net profit.

Where are you seeing the 20%?  Is that the total of both taxes?  

[KD416]

Yes, the total makes up 20%.