Exact Schedule SE calculation

[Leen1]

Schedule SE Line 4a (and similarly for Line 5b) have us multiply our self-employment net profit by 0.9235 to, er, approximate our net earnings, which is how much our self-employment net profit will be after one half of the self-employment tax is subtracted. This approximate net earnings is then used to compute the self-employment tax, half of which is subtracted from our Schedule C net profit to give our actual net earnings.

It is probably not surprising to you that the value of the reduction when multiplying by 0.9235 and the half of the actual Schedule SE tax are not the same. That is, we are failing to solve this circular math accurately.  Nonetheless, this could be solved with an exact calculation, which is a little harder but very much doable. Why isn't the exact approach used? Here's the math:

• Let C = Schedule C net profit plus Church-employee income that had no social security withholding.
• Let L = $176,100 = the 2025 income limit for the social security tax.
• Let W = all your wages plus other income that was already subject to the social security tax.
• Let R = L - W (but not less than zero) = how much remaining income can be subject to the social security tax.

We want to compute: N = Net Earnings = C minus half of the SE tax.  We compute:

• N1 = C / 1.0765.
• N2 = (C - (0.062 * R)) / 1.0145.
• N = LargerOf(N1, N2).

N is the the exact value for net earnings. That is, it will be exactly consistent with the self-employment tax that is subsequently computed from it. (Well, if we round to the nearest dollar at some steps, there could be a slight inaccuracy due to the rounding.) Shouldn't the form have us do this exact calculation?

[AmeliesUncle]

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@Leen1 wrote:

Schedule SE Line 4a (and similarly for Line 5b) have us multiply our self-employment net profit by 0.9235 to, er, approximate our net earnings, which is how much our self-employment net profit will be after one half of the self-employment tax is subtracted.

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No, those are two different things.  Multiplying by 0.9235 is NOT meant to approximate the net profit minus 1/2 SE tax.  It is sort-of meant to equate things to W-2 wages.

[VolvoGirl]

SE Tax calculation (it’s not circular)

You will 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 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 $10,918.20 for social security. The max income for social security for 2025 is $176,100 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.

You are paying 15.3% for……

SS for employer 6.2%

SS for employee 6.2%

Medicare for employer 1.45%

Medicare for employee 1.45%

[Leen1]

@AmeliesUncle thank you.  I think we are disagreeing over the wording, but not necessarily over the math.  With your wording... the exact approach I supply is meant to change "It is sort-of meant to equate things to W-2 wages" to it "It is meant to exactly equate things to W-2 wages."

[Leen1]

@VolvoGirl thank you.  You have described the existing methods from the IRS publications and form instructions in detail.  I would be interested in your thoughts on the variation I have proposed which is to replace N=0.9235C with N=LargerOf(N1, N2), but leave the rest the same.