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How to calculate self employment tax



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in this video we're going to talk about

how to calculate your self-employment

tax

but before we do if this is your first

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bottom my name is travis sickle

certified financial planner helping you

reach your financial goals

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[Applause]

so self-employment tax is your payroll

tax also known as

fica and fica is your federal insurance

contributions act and these are the

payments

the payroll payments that you're making

to pay for social security

and medicare now they can further be

broken down

into the employer side and the employee

side

so as somebody who is self-employed

you're going to pay

both sides because you're both the

employee and the

employer now before we do the

calculation i want to break it down

just so you can see how all the numbers

add up so we're going to start with

social security and medicare so the

social security side

is going to be 6.2 percent for the

employee

and then it's going to be 6.2 percent

for the employer and then on the

medicare

side it's going to be 1.45 percent for

the employee

and then 1.45 for the employer now if we

add up the social security

that's going to equal 12.4 percent and

then if we add up the medicare

side that's going to be 2.9

which if we add these two numbers up

12.4 percent

plus the 2.9 percent that is going to

equal 15.3 percent

and if we further add these two and

these two that's going to be 7.65

percent

for the employee and then 7.65 percent

for the employer

which equals our 15.3 percent so this

will be for our employer

and this will be for our employee now

before we get into the actual

calculation

and multiply it out to figure out what

our self-employment taxes

are we need to understand two terms

one is called net profit and the other

one is net

earnings from self-employment now

there's a slight difference in the two

but if you use the wrong number you're

gonna get the wrong answer so you can

find your net profit on your schedule c

for profit and loss from your business

and on line seven for 2019 you're going

to see your gross

income for this example we're going to

use a hundred thousand dollars

now you can see in part two your

expenses i didn't put any expenses here

but these would be subtracted from your

gross income

and on line 31 of your schedule c

is where you're going to find your net

profit and this is the number that we're

going to put

on our self-employment tax or our

schedule se

so let me go ahead and pull that up this

is where we're gonna do the calculations

for our self-employment tax and what you

can see here

is that we put our net profit on line

two

or profit or loss and we put in the

hundred thousand dollars

now you can't simply multiply your fica

rate

which is 15.3 percent multiplied by your

net profit

you actually need to take it a step

further so what you need to do

is you need to multiply it by 92.35

percent which is what you can see on

line four

and that's where we get the 92 350. now

the reason we do that

is because what we're doing is

subtracting

one half of the rate of our

self-employment so just to show you on

paper

if we take a hundred and we subtract

7.65

we're going to get 9235

percent so it's 92.35

percent now if we were to write this out

it would be

0.9235 and that's what you would enter

in on the calculator

and in this example our 92 350

is our net earnings from self-employment

and as you can see on the schedule

sc for self-employment tax if your

income

is below 132 900

or less then you could just multiply it

by that rate

of 15.3 percent and that's exactly what

we did

if we multiply the 92 350 dollars

by 15.3 percent

that's where we get the 14 130 dollars

now one half of that or the deductible

portion

is seven thousand sixty five dollars and

the reason that you see the hundred and

thirty two thousand nine hundred or less

multiplied by line four which is our net

earnings from self-employment

multiplied by fifteen point three

percent is because the hundred and

thirty two thousand

nine hundred dollars is the maximum

amount that will be applied for the

social security the medicare side

doesn't have a limit

so that gets applied no matter how much

money you earn and that's why you see

the adjustment of more than 132

900 multiplied by 2.9 percent

which is the medicare side then you just

add the additional sixteen thousand four

hundred and seventy nine dollars and

sixty cents

and the reason they broke it down here

where it's just

adding the sixteen thousand four hundred

and seventy nine dollars and sixty cents

is because if you take twelve point four

percent

and multiply it by that social security

max of a hundred and thirty two thousand

nine hundred dollars

that's how you get the sixteen thousand

four seventy nine sixty and if you earn

even more money there's an additional

medicare tax of

0.9 of 1 additional

but those have income thresholds and

those income thresholds

if you're married filing jointly is 250

000

and above if you're married filing

separately it's 125

000 and above and if you're single head

of household or a qualifying widower

it's 200 000 and above so to avoid

making a mistake

paying too much in taxes or just being

confused about your self-employment

taxes it's important to remember that

it's based on your net earnings from

self-employment

and not your net profit and that is how

you calculate your self-employment tax

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