How to Compute Self-Employment Tax
Knowing how to compute self-employment taxes will take the anxiety out of paying the IRS. All self-employed individuals are responsible for paying self-employment taxes on net earnings of $400 or more. Nonetheless, if you need to know how to calculate self employment tax, you can follow the steps below:
1. In order to calculate your net earnings, you must start by taking your gross business income, and then subtract from it your business expenses. This will give you your net earnings.
2. Then multiply your net earnings by 92.35% (or 0.9235). This is the portion of your net earnings that is subject to self-employment taxation only.
3. Now, take your adjusted net earnings figure and multiply it by the Social Security rate of 12.4%. Remember, there is a limit on net earnings if the number exceeds $106,800. That is, the Social Security portion is only applicable to the first $106,800; any excess is not subject to taxation.
Please continue to Page 2 for more on How to Compute Self-Employment Taxes.