I am curious as to why my refund is $3000 less as a self employed small business owner as opposed to a w2 employee with the same income

[VolvoGirl · Accepted solution]

You need to pay the self employment tax in addition to any regular income tax on it.

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 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.  You do get to take off the 50% ER portion of the SE tax as an adjustment on 1040 Schedule 1 line 27.   The SE tax is already included in your tax due or reduced your refund.  It is on the 1040 Schedule 4 line 57 which goes to 1040 line 14.  The SE tax is in addition to your regular income tax on the net profit.

[VolvoGirl]

When you are an employee your employer takes Social Security and Medicare taxes out of your paychecks.  When you are self employed you have to pay it in yourself on your profit.  

[savannamiller750]

so how do I take 50% off the er portion? will it just allow me to edit that line before I file? what is er? thank you for your help i figured it was self emplyment tax related

[VolvoGirl]

ER = Employer.  Turbo Tax deducts that automatically.  

[savannamiller750]

got ya...thank you so much