How to understand income tax plus self employment taxes for a 1099 contractor

[schmoe3]

As a 1099 contractor I have to pay federal income tax plus the self employment tax. I want to be more proficient in understanding how this all works. If there's an online resource you know of that would be helpful please let me know where that is.

I will file as married filing jointly. Let's throw some numbers into the mix just for the sake of discussion: Let's say my AGI is $30,000.

For income taxes, it's 10% of the first $18150 so the tax on this is $1815

Then $30,000-$18150 is $11850 and that amount is taxed at 15% which means I owe an additional $1778, rounding up to the nearest dollar.

So far we have $1815 plus $1778 equals $3593 in taxes that I owe, before adding the self-employment tax.

Then we have to add a total of 15.3% tax for self-employment taxes. This is where I start to get lost because according to calcxml.com self employment calculator, they subtract a 'self-employment adjustment' from the AGI before calculating 15.3% of the income--I do not know what the self-employment adjustment is.

Then when the self-employment tax is calculated, there's a tax deductible portion that is reported on form 1040.

Without considering a definite AGI, let's say the total taxes I owe between income tax and self employment tax equals the sum of $5000. Does that mean that if $2000 is the tax deductible portion of my self employment taxes, that my final tax bill would be $3000? Thanks...

[AmandaR2 · Accepted solution]

Hi Schmoe3,

No, it is a circular calculation. The calculation for income tax in your example is incorrect because you get to take a deduction for half of the self employment taxes you owe before calculating the 10%. Therefore, assuming you were saying your SE taxes were 2,000 then you would have done total income 30,000 - 1,000 (half of your SE tax) = 29,000 before calculating the income tax portion. I've included links to Sch C and the Form 1040, if you look at line 27 on Form 1040 you will see the deduction for 1/2 of SE tax.

Also, there are a few other pieces you are missing. The SE tax is on 92.35% of your net self employment income. Net self employment income is all related revenue minus applicable deductions.  

Then to elaborate on the SE tax percentage, it is only 15.3% on the first $113,700 of income. After that the tax is only 2.9%, which is medicare. This year this is an additional medicare tax of .9% that is applicable on income levels over 250,000 for married taxpayers or 200,000 for single taxpayers. 

For reference, please refer to the following IRS resources:

http://www.irs.gov/pub/irs-pdf/f1040sc.pdfhttp://www.irs.gov/pub/irs-pdf/f1040.pdf

http://www.irs.gov/taxtopics/tc554.html

http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Employed/Self-Employed-Individuals-Tax-Cente...

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employment-Tax-Social-Security-a...

Let me know if you have additional questions. Thank you for choosing TurboTax!

Amanda

[schmoe3]

Thank you so much for your clarifications. I will work with some numbers and calculate some things that apply to my situation. I'll come back for more questions regarding deductions, thanks again!

[christi11]

As a self employed person you get to claim your medical premiums as a deduction.  My husband and I both work "real jobs" and we have side jobs as well.  We get our insurance from my "real" employer - can we claim any of this off on the schedule C?  Or at least can my husband claim what we pay for him?

[VolvoGirl]

No you can't claim it under self employed.  And usually it comes out of your paychecks pre-tax meaning before tax so you can't deduct it at all.

[VolvoGirl]

Here's some more general info

Self Employment tax (Scheduled SE) is generated if a person has $400 or more of net profit from self-employment on Schedule C.  You pay 15.3% for 2013 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 line 27 of the 1040.  The SE tax is already included in your tax due or reduced your refund.  It is on the 1040 line 56.  The SE tax is in addition to your regular income tax on the net profit.


If you have self employment income of $400 or more you have to file a schedule C in your personal 1040 return for self employment business income. You may get a 1099Misc for some of your income but you need  report all your income.  So you need to keep your own good records. Here is some reading material……

IRS information on Self Employment….
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employed-Individuals-Tax-Center

Pulication 334, Tax Guide for Small Business
http://www.irs.gov/pub/irs-pdf/p334.pdf

Publication 535 Business Expenses
http://www.irs.gov/pub/irs-pdf/p535.pdf


PAYING ESTIMATES
For SE self employment tax - if you have a net profit (after expenses) of $400 or more you will pay 15.3% for 2013  SE Tax on 92.35% of your net profit in addition to your regular income tax on it. So if you have other income like W2 income your extra business income might put you into a higher tax bracket.

You must make quarterly estimated tax payments for the current tax year (or next year) if both of the following apply:
- 1. You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits.
 
- 2. You expect your withholding and credits to be less than the smaller of:
    90% of the tax to be shown on your current year’s tax return, or
  100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)

To prepare estimates for next year, Go to….
Federal Taxes or Personal (H&B version)
Other Tax Situations
Other Tax Forms
Form W-4 and Estimated Taxes - Click the Start or Update button

[krazykat201]

Hi,

This is a question directed to "TurboTaxAmandaR" who provided the Recommended answer, but , of course, any one who knows the answer is welcome to respond.

Amamda talks about if Schedule C to shows a Net profit of greater than $400, then the SE form is generated and several additional lines of 1040 are completed, eg line 27 to probably 31.

My question:  if I complete Schedule C with all my self employed information and show greater the $400 net profet (on line ?? of SCH C)  will Turbo Tax , Premium, automatically do the form 1040 line 27 to 31 calculationa and populate the 1040 lines?

Thanks

[VolvoGirl]

Yes.  Line 27 is the deductible part of the SE tax which is half the tax.  
Line 28 is the deduction for any SEP IRA or self employed retirement contributions you make.
Line 29 is the deduction for self employed health insurance.

But if you are using the Online version then you have to upgrade to Home & Business to fill out the full schedule C.  Premier will do the schedule C-EZ.