Let me preface this by saying that I am not anywhere near an expert on taxes. I haven’t even itemized deductions before, since I don’t have any mortgage interest to get me over that standard deduction hump. Thus, I’m just writing what I think I’m reading, and tax gurus can correct me.
I’m trying to learn more about self-employment tax. Since you’re not splitting your Social Security Tax with your employer (you’re the employer), you get to pay 15.3% tax on your income. This is in addition to your federal, state, and local income tax. You do get to deduct half of your 15.3% tax from your net earnings, since “regularly” employed people don’t pay tax on the part paid by their employer either. Still, let’s see how much out of every gross $100 I make ends up in my pocket. This simplification assumes no business expenses.
$100 gross income = $92.35 in net income subject to income tax.
My marginal tax brackets (already here after wife’s income): 25% Federal, 9% State/Local
Social Security Tax = 15.3% of $100 = $15.30
Federal Tax = 25% of $92.35 = $23.09
State/Local Tax = 9% of $92.35 = $8.31
Out of $100, I am left with $53.30. 50% off sale!
Ouch. Now, I know that I am really only paying about 8% more in taxes that I would have in my old job, but I think my mind just treats it differently because I’m thinking of it as “extra” income. I know that doesn’t make any real sense, but knowing that if I charge $500 for something, I’ll only get $266, somehow changes whether I feel it is worth the effort.
There are tons of other stuff I want to learn about next. I’m going to take every single allowable tax deduction and business expense known to man, reduce my liabilities by perhaps forming an LLC/S-Corp/C-Corp, getting a Tax ID, maybe a fictitious DBA business name, getting a business checking account, getting a business credit card (although I guess I already have one), getting a PO Box, solo 401ks, and more. I welcome all self-employed people to bury me with advice! =D