Self Employment Surprise

Today TaxMama hears from Alyssa in the TaxQuips Forum, who is surprised. “I am a small business owner, a personal chef. But I also work for a catering company. Even though I made less this year on my adjusted gross income then last year, I owe $1,300; while I paid $200 last year! Could it be because I made $6,700 more from my business income this year and have to pay more self-employment tax then last year?
It just doesn’t seem like it should be that much of a difference!”

Rita Lewis, the enrolled agent from CT give Alyssa a perfect answer. She says:

Yes Alyssa,

I think you figured out your own answer!  Your difference in self-employment tax at 15.3% on the extra $6,700 is $1,025.  Earning a bit less overall was probably not enough to put you into a lower income tax bracket.  Deductions may have varied from year to year.  Put both returns next to each other and go through them line by line to find other differences.  My favorite proofreading tool is a two-year comparison.

You feel the pinch more at tax time when you make more self-employment income, unless you were making estimated payments throughout the year.  When you’re paying both the income tax AND the self-employment tax in one lump sum with your tax return, you’re very aware of how much it is. 

As an employee, you don’t have the self-employment tax (although half the amount was withheld from your paychecks as FICA & Medicare with your employer matching the other half) and the income tax was withheld gradually throughout the year.  Gradual and less painful, but it still adds up.  Notice the “Total Tax Liability” line on your return. 

Rita adds some excellent advice. When you’re pricing your services for potential clients, remember to factor in your income and self-employment taxes on your profits.

And remember, you can find answers to all kinds of questions about being self-employed and other tax issues, free. Where? Where else? At  www.TaxMama.com.

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