How can I determine my Marginal and Effective tax rates from my previously filed tax forms?

Wait, for the effective rate, shouldn't I be dividing by my Adjusted Gross Income (line 11) instead of my total income? And do I include the self-employment tax in the "total tax" number when calculating effective rate?

For the most accurate effective tax rate, it's better to use your total income before adjustments, not your AGI. This gives you a clearer picture of what percentage of your actual earnings went to taxes. Regarding self-employment tax, yes, you should include this when calculating your total tax burden. Add line 24 from your 1040 (total federal income tax) to line 4 from Schedule 2 (self-employment tax) to get your complete federal tax obligation. This gives you a more comprehensive view of your effective tax rate since self-employment tax is a significant part of your overall tax picture when you have Schedule C income.

Did it handle the self-employment income correctly? My accountant always tells me that's trickier because of the additional SE taxes on top of regular income tax.

How accurate is it? I've tried other calculators before and they always seemed to be off by a few percentage points compared to what my accountant calculated.

Yes, it handled self-employment income perfectly. It separately calculated the SE tax portion and showed how that affected my overall tax burden - which was super helpful for planning quarterly estimated payments. As for accuracy, it was spot-on when I compared it to my actual tax return numbers. It uses the exact IRS tax brackets and formulas, so there's no approximation like with some basic calculators. It even handled the phaseouts of certain deductions which other calculators missed completely.

Wait, how does this actually work? Does it just call the IRS for you? Why would that be faster than me calling directly?

Sounds like a scam honestly. Nobody can magically get through to the IRS faster. They have one phone system and everyone has to wait in the same queue.

It doesn't call for you - it uses technology to navigate the IRS phone system and waits on hold so you don't have to. When an actual agent picks up, it calls your phone and connects you directly. It's basically like having someone wait on hold for you. It works faster because their system knows exactly which prompts to select in the IRS menu to get to the right department, and it can redial automatically if disconnected. When I called myself, I kept getting the "due to high call volume" message and being disconnected, but their system just keeps trying until it gets through.

This is exactly what I'm concerned about. When I think about taking on more side work, I'm trying to figure out how much of that additional income I actually get to keep. Are you saying that almost half goes to taxes when you add everything up?

Yes, unfortunately. For every additional dollar I earn in my side business, about 45 cents goes to taxes when I add everything up. Federal income tax is around 24% for me, self-employment tax is 15.3% (though half of that is deductible on federal taxes, which helps a little), and my state tax is about 6%. It's still worth doing the side work for me, but I make sure to set my rates with this in mind. I basically need to charge almost double what I want to actually keep after taxes and expenses.

That's not quite right for someone with self-employment income. You need to include the self-employment tax too (Schedule 2, line 4), otherwise you're undercounting your total tax burden.

This is really helpful! I've been struggling with this exact same situation. One follow-up question - when you mention deducting half of the self-employment tax, where does that show up on the forms? I see the SE tax calculation on Schedule SE but I'm not sure where the deduction part gets applied on my 1040. Also, do you happen to know if there's a simple way to project what my rates would be if I increased my consulting income by a certain amount? I'm trying to decide whether it's worth taking on a bigger project next year.

Great questions! The self-employment tax deduction shows up on line 15 of your 1040 (it's labeled "Deductible part of self-employment tax"). This reduces your adjusted gross income, which then lowers your taxable income and the amount of federal income tax you owe. For projecting your rates with increased income, you can do a rough calculation: figure out which tax bracket your additional income would fall into, then add the 15.3% SE tax. So if you're currently in the 22% bracket and stay there, each additional dollar from consulting would be taxed at roughly 37.3% (22% + 15.3%). But if the extra income pushes you into the next bracket (24%), it would be closer to 39.3%. One thing to watch out for - if you're getting close to the Social Security wage base limit ($160,200 for 2023), the SE tax rate drops to 2.9% once you hit that threshold, which can actually make higher income levels more tax-efficient. The calculations can get complex pretty quickly, which is why some of the tools mentioned earlier in this thread might be worth checking out for more precise projections.

@Isabel Vega Great question! The deduction for half of the self-employment tax shows up on line 15 of your 1040 it (s'part of the adjustments to income section .)This reduces your adjusted gross income, which then flows through to reduce your taxable income and ultimately your income tax liability. For projecting future rates with increased consulting income, here s'a simple approach: Take your current taxable income line (15 and) add your projected additional net profit from consulting. See which tax bracket that new amount falls into - that gives you the marginal rate for the additional income. Then add 15.3% for self-employment tax minus (the tax benefit of the deduction, which is roughly your marginal tax rate × 7.65% .)So if you re'in the 22% bracket and earn an additional $10,000 from consulting, you d'pay approximately: - $2,200 in additional income tax 22% (-) $1,530 in SE tax 15.3% (-) Minus about $169 tax savings from the SE tax deduction 22% (× $765 -) Net additional taxes: roughly $3,561 or about 35.6% of the extra income This helps you see if that bigger project is worth it financially!

Great questions! The self-employment tax deduction shows up on line 15 of your 1040 (it's part of the "Adjustments to Income" section). You'll see it listed as "Deductible part of self-employment tax" - this is automatically calculated as half of your SE tax from Schedule SE. For projecting your rates with increased income, here's a simple approach: First, figure out which tax bracket your additional income would fall into (that's your marginal rate). Then add 15.3% for SE tax on that additional income. So if you're currently in the 22% bracket, each additional dollar from consulting would be taxed at roughly 37.3% (22% + 15.3%) before considering state taxes. You can also use the IRS withholding calculator or tax software to model different income scenarios. I usually run a few "what if" scenarios in my tax prep software to see how different amounts of additional consulting income would affect my overall tax picture. @9fe8fc8474be Thanks for the clear explanation - it really helped clarify the effective vs marginal rate distinction!

Great questions! The deduction for half of your self-employment tax shows up on line 15 of your 1040 (it's part of the "adjustments to income" section). You'll see it listed as "Deductible part of self-employment tax" - this reduces your adjusted gross income, which is why it's beneficial. For projecting your rates with increased consulting income, here's a simple approach: Take your current taxable income and add your projected additional consulting income to it. Then see what tax bracket that new total puts you in - that's roughly what you'll pay in marginal federal income tax on the extra income. Don't forget to add the 15.3% SE tax on top of that (though you'll get to deduct half of the SE tax portion). For example, if you're currently in the 22% bracket and additional income would keep you there, you'd pay roughly 22% + 15.3% = 37.3% on the extra consulting income (before considering the SE tax deduction benefit, which reduces it slightly). The tools others mentioned like taxr.ai might be helpful for doing these projections more precisely, especially if you want to see exactly how much you'd keep after all taxes.

Great questions! The deduction for half of your self-employment tax shows up on line 15 of your 1040 (it's one of the "adjustments to income" that reduces your AGI). You don't have to calculate it separately - TurboTax should have done this automatically when you filed. For projecting your rates with increased consulting income, here's a simple approach: Take your current taxable income and add the projected additional net profit from your consulting. See which tax bracket that new amount falls into - that's your new marginal rate. Then you can estimate that any additional consulting income will be taxed at roughly that rate plus the 15.3% SE tax (minus the deduction benefit). For example, if adding $10K in consulting income would push you from the 22% bracket to the 24% bracket, your marginal rate on that extra income would be about 24% + 15.3% = 39.3% (before considering the SE tax deduction, which would lower it slightly). There are some online calculators that can help with this projection, or you could run a "what-if" scenario in TurboTax to see the exact impact.