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SELF EMPLOYMENT TAXES: (IRS Publication 533 Schedule SE)
The combined employer share and employee share of this tax is 12.4% for Social Security and 2.9% for Medicare. Social Security maxes out at $94,200 income.
It is difficult to explain it clearly without using an example to illustrate how it works, so here are two examples at different income levels:
Example # 1: $10,000 self-employment income:
Net profit from business………......……$10,000------100%
Self-employment tax (12.2% SS +2.9% Mcare) X 50%...765……..7.65%
Balance—Subject to Self-employment tax…9235….92.35%
Self-employment tax$9235 X 15.3%.…..1413….14.32955%
Schedule SE does not show all of this detail. It just tells you to multiply the business net income by 92.35%, then take 15.3% of that amount.
Since you pay both the employee and employer share of the tax, you are allowed to deduct half of it as an expense. This is done by subtracting half the $ 1413 ($ 707) which you enter on line 27 of page 1, Form 1040
Example # 2: $200,000 net income from self-employment
NOTE: The maximum for Soc Sec is $ 94,200 but there is NO maximum on Medicare
Multiplied by 92.35%…184,700……92.35%
Social Security Maximum……..94,200
Social Security tax …12.4% X 94,200 = 11680
Medicare tax…2.9% X 184,700 = 5356
Total Self-employment tax……11680 + 5356 = 17036
Deduct 50% on line 27, page 1, form 1040….8518
If you need IRS forms or publications:
This information is not intended to be advice to the recipient.In compliance with Treasury Department Circular 230, unless stated to the contrary, any Federal Tax advice contained in this Blog was not intended or written to be used and cannot be used for the purposes of avoiding penalties.