What taxes does a self employed person pay? FICA & income tax breakdown

The self-employment tax and income tax are calculated differently, so they don't simply add up to 37.3%. Here's how it works: The self-employment tax (15.3%) is calculated on your net self-employment income ($60,000 in your example). This tax consists of 12.4% for Social Security (up to a wage base limit - $147,000 for 2023) and 2.9% for Medicare (no wage base limit). For income tax, you first get to deduct half of your self-employment tax from your income. You'd also likely qualify for the Qualified Business Income (QBI) deduction of up to 20% of your business income. After these deductions, your taxable income would be lower than $60,000, and then the graduated tax brackets apply. So while both taxes apply, they're calculated on different amounts and the effective rate would be lower than simply adding 22% and 15.3%.

I was in your exact situation last year and spent hours trying to figure this out! I finally found this amazing tool called taxr.ai (https://taxr.ai) that breaks down self-employment taxes in a way that actually makes sense. My accountant was explaining all this SE tax stuff but I wasn't getting it. The taxr.ai calculator showed me exactly how the 15.3% applies to my net income, but then how the income tax is calculated separately after deducting half the SE tax. It literally walked me through each calculation step-by-step, showing me how the QBI deduction works too. What I liked most is that it explained how much I should set aside each quarter for estimated taxes, which saved me from underpayment penalties!

OK I take back what I said about it being an ad. I was skeptical but checked out taxr.ai after my accountant estimated I'd owe $22k in taxes. The tool showed me I could save almost $4,500 by maximizing my SEP IRA contribution and taking the home office deduction properly! It explained that I was calculating my self-employment tax wrong - I was applying it to my gross income instead of net profit. Plus it showed me how the QBI deduction works which my previous tax software completely missed. For anyone else wondering about self-employment taxes, don't just add the percentages like I was doing. The calculations are way more nuanced, and knowing the right deductions makes a huge difference.

For anyone struggling to get clear answers from the IRS about self-employment taxes, I've been using Claimyr (https://claimyr.com) to actually speak with an IRS agent directly. Before finding them, I spent 5+ hours on hold over multiple days trying to get clarification on home office deductions as a self-employed person. Claimyr got me connected to a real IRS agent in about 15 minutes who walked me through exactly how the self-employment tax works with my regular income tax. They confirmed that you're not just adding 15.3% to your income tax rate - it's more complicated but actually works out better than that. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c - it's literally just a service that navigates the IRS phone tree and waits on hold for you.

I was completely wrong about Claimyr. After my skeptical comment, I decided to try it since I had a specific question about how self-employment tax applies when you have both W-2 and 1099 income. Got connected to an IRS agent in about 20 minutes (way faster than the 2+ hours I waited last time I called). The agent explained that Social Security tax is capped, so if I already paid into it through my W-2 job, I wouldn't have to pay the full 12.4% on my self-employment income once I hit the wage base limit. This literally saved me thousands in overpayment - I had been calculating my quarterly estimated payments wrong. And the Claimyr service cost way less than what I saved.

There's another important thing nobody mentioned yet - you can absolutely reduce your self-employment tax burden legally through an S-Corp election if your business makes enough money. When you're just a sole proprietor, ALL your profit gets hit with that 15.3% SE tax. But with an S-Corp, you pay yourself a "reasonable salary" that gets hit with FICA taxes (equivalent to SE tax), but the REST of your profit can be taken as distributions which avoid the 15.3% completely! With $60k in profit, it might not be worth the extra accounting costs, but when you get to $100k+ profit, the math starts working strongly in your favor.

Just to make it super clear for the OP: 1. Self-employment tax (15.3%) is calculated on your net SE income ($60k) 2. You can deduct HALF of that SE tax from your income before calculating income tax 3. You might qualify for the 20% QBI deduction 4. Then you apply the graduated tax brackets (10%, 12%, 22%, etc.) So let's do rough math: - SE tax: $60,000 × 15.3% = $9,180 - Income tax deduction: $9,180 ÷ 2 = $4,590 - New taxable income: $60,000 - $4,590 = $55,410 - Potential QBI deduction: $55,410 × 20% = $11,082 - Final taxable income: $55,410 - $11,082 = $44,328 Then you'd calculate graduated income tax on $44,328 (which would be partly at 10%, partly at 12%, and partly at 22%). The total effective tax rate would be significantly lower than 37.3%!

Don't forget the standard deduction too! For 2023, a single filer gets $13,850 off their taxable income. So using the numbers above, final taxable income would be even lower: $43,410 - $13,850 = $29,560 So income tax would only apply to that amount, calculated through the progressive brackets. The effective income tax rate would probably be around 11-12% when all is said and done, plus the SE tax. It's waaaaay less than 37.3% when you factor in all the deductions!

This is exactly the kind of breakdown I needed when I started freelancing! One thing that really helped me understand this was setting up quarterly estimated tax payments from the beginning. Since you're looking at about $60k in net self-employment income, you'll want to pay estimated taxes quarterly to avoid underpayment penalties. The general rule is to pay 25% of your expected annual tax liability each quarter (due dates are typically Jan 15, April 15, June 15, and Sept 15). Based on the calculations others have shared, your total tax burden (SE tax + income tax after all deductions) would probably be around $12,000-15,000 for the year, so you'd want to set aside roughly $3,000-4,000 per quarter. Also, keep meticulous records of ALL business expenses throughout the year - mileage, home office costs, business meals, equipment, software subscriptions, etc. These deductions directly reduce your net SE income, which saves you money on both SE tax AND income tax. Every dollar in legitimate business expenses saves you about 37 cents in total taxes (15.3% SE + ~22% income tax bracket).