The Self-Employment Tax What are the Good news?

[Daniro]

Hi, I was looking for SE most common tax deductions to check that I was not missing any and I found this information: I have been doing my taxes as SE for several years and I have always reported my gross income on the income part (self employed income and expenses), then reported my expenses (office, supplies, etc.) and after that TT calculates my taxes based on my net income. It seemed pretty straight forward. However, according to the paragraphs below, I could input my income dividing it in two separated sections (at least is what I understood). It seems the detail would be a change on the bracket (I don't even know if this would apply to me since I file jointly married). I just wanted to know that I am not missing something. Thanks in advance for your help.

 

Good news

When figuring self-employment tax you owe, you get to reduce self-employment income by half of the self-employment tax before applying the tax rate. Say, for example, that your net self-employment income is $50,000. That's the amount you report as taxable for income tax purposes on Form 1040.

But when figuring your self-employment tax on Schedule SE, Computation of Social Security Self-Employment Tax, the taxable amount is $46,175. Not paying the 15.3 percent tax on the $3,825 difference in this example saves you $585.

More good news

You can claim 50% of what you pay in self-employment tax as an income tax deduction. For example, a $1,000 self-employment tax payment reduces taxable income by $500. In the 25 percent tax bracket, that saves you $125 in income taxes. This deduction is an adjustment to income claimed on Form 1040, and is available whether or not you itemize deductions.

An example

• You run a catering business as a sole proprietor.
• In 2024 your net profit as reported on Schedule C is $35,000.
• Your net earnings subject to self-employment tax as calculated on Schedule SE would be $32,323 ($35,000 x 0.9235).
• Your self-employment tax would be $4,945 (32,323 x 0.153) and you would report that amount on Form 1040 in the "Other Taxes" section.

Then you would report one-half of your self-employment tax, $2,473, ($4,945 X .50) on Form 1040 as an adjustment to income, which reduces your Adjusted Gross Income and the amount of income tax you owe.

[VolvoGirl · Accepted solution]

There’s nothing you have to do.   All that is automatically calculated in Turbo Tax.   

You pay Self Employment tax (Scheduled SE) on a Net Profit of $400 or more on Schedule C in addition to regular income tax on it.   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.  So you get social security credit for it when you retire.  

The SE tax will be automatically included in your tax due or reduce 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.  You do get to take off the 50% ER portion of the SE tax as an adjustment on 1040 Schedule 1 line 15 which flows to 1040 line 10.

The SE tax includes what you already paid in from your W2s so your schedule SE tax will only be the difference up to the max amount of $9,932.40 for social security. The max income for social security for 2023 is $160,200 between W2 wages and the schedule C Net Profit.  If you also have W2 income, you have to break out the Social Security and Medicare taxes. Only the Social Security part maxes out.

[Bsch4477]

TurboTax makes the self employment tax adjustment automatically. You don’t have to change anything. Look at line 15 of Schedule 1. 

[VolvoGirl]

Oh For 2024 the max for Social Security is $10,453.20 on $168,600 of wages (168,600 x 6.2%).