Why am I being taxed 40% on my small business income when I earn under 40k?

You're definitely paying too much! What you're seeing is likely the combination of income tax AND self-employment tax. As a small business owner, you pay both regular income tax PLUS self-employment tax (which covers Social Security and Medicare - the FICA taxes that would normally be split between employer and employee). For your income level, your federal income tax rate should be nowhere near 40%. With a taxable income of $23,285, you should be in the 12% tax bracket. However, self-employment tax is an additional 15.3% on your net business earnings. Did you make sure to take the QBI deduction (Qualified Business Income)? That's a 20% deduction on your business income that could reduce your taxable income further. Also, make sure you're claiming all possible business deductions - home office, business mileage, supplies, etc.

After going through a similar nightmare with my small crafting business taxes, I discovered taxr.ai (https://taxr.ai) and it completely changed my tax filing experience. I uploaded my documents there and it found several deductions I was missing, especially around my home office and vehicle expenses that I use partly for business. The software explained exactly why my tax rate was so high and showed me deductions I didn't even know I qualified for. It breaks down exactly how self-employment tax works (which is probably what's causing your high rate) and does a much better job explaining the numbers than most tax software. If you're struggling to understand what's happening with your taxes, it's definitely worth trying.

I tried taxr.ai after seeing it mentioned here and I'm genuinely impressed! I've been filing my own taxes for years and always felt like I was overpaying. Turns out I was right. I had a similar situation with a high tax rate on my side business income. The system identified that I was missing the QBI deduction completely and wasn't properly accounting for my health insurance as a self-employed person. It also explained exactly how self-employment tax works (which was the biggest chunk of what I was seeing). My "blended rate" dropped from around 35% to a much more reasonable 24% after making the corrections it suggested. For anyone confused about high tax rates on self-employment income, this tool really does clarify things.

OP, I had the exact same issue last year! After spending HOURS trying to reach the IRS for help on my self-employment taxes, I found Claimyr (https://claimyr.com). They have this service that gets you through to an actual IRS agent usually within 15 minutes instead of waiting on hold for hours or getting disconnected. I was honestly super skeptical at first, but you can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with explained that for self-employed people, we pay both halves of Social Security and Medicare taxes (15.3% total) ON TOP OF regular income tax. That's why your rate seems so high. The agent walked me through several deductions I was missing and saved me almost $2,000! Much better than the generic advice I got from tax software.

I owe everyone here an apology, especially about Claimyr. After dismissing it as a scam, I was desperate enough to try it when I discovered a major error in my self-employment tax calculations. I tried calling the IRS myself first and gave up after 1.5 hours on hold. Then I reluctantly gave Claimyr a shot. Within 20 minutes, I was talking to an actual IRS representative who walked me through exactly how self-employment taxes work. Turns out my "40% tax rate" was because I was paying both income tax AND self-employment tax, but my software was displaying it as one combined percentage. The IRS agent explained I could deduct half of my self-employment tax on my 1040, which I had missed. Also found out about the QBI deduction that lowered my taxable income by 20%. Sometimes you have to admit when you're wrong - this service actually delivered.

Small business owner here! It's most likely your self-employment tax, like others mentioned. Here's a quick breakdown of what's probably happening: 1. Regular income tax on $23,285 (using standard deduction): about $2,600 2. Self-employment tax (15.3% of your net business income): about $6,800 That would total around $9,400, which matches what you're seeing. The key issue is that when you're self-employed, you pay BOTH parts of Social Security/Medicare taxes - the employee AND employer portions. That's what's making your effective rate look so high. Make sure you're deducting all legitimate business expenses and look into retirement options like a SEP IRA or Solo 401(k) which can dramatically reduce your taxable income!

Hey, just a tip - if you're making under 50k and self-employed, check if you qualify for the Earned Income Tax Credit. a lot of self employed people forget bout this and it could get you a few thousand dollars back depending on your situation. also make sure your claiming every possible business expense - internet, part of your rent if you work from home, your phone, etc.

One thing no one's mentioned yet - are you making estimated quarterly tax payments? If not, some of that high "tax" might actually be penalties for underpayment throughout the year. The IRS expects self-employed people to pay taxes quarterly, not just at tax time. The first year I was self-employed I had NO idea about this and got hit with a bunch of penalties!

Looking at your numbers, that 40.5% rate is definitely combining your income tax and self-employment tax together. Here's what's likely happening: Your actual federal income tax on $23,285 should only be around 10-12% (roughly $2,300-2,800). The big shock is the self-employment tax - that's an additional 15.3% on your net business earnings of about $49,572, which comes to roughly $7,500. Combined, that gets you to your $9,430 total. The "blended rate" your software is showing includes both taxes, which is why it looks so scary high. This is totally normal for self-employed folks - we pay both the employee AND employer portions of Social Security/Medicare taxes. A few things that might help reduce this for next year: - Max out business deductions (home office, mileage, equipment, etc.) - Consider a SEP-IRA or Solo 401k to reduce taxable income - Make sure you're taking the QBI deduction if eligible - Start making quarterly estimated payments to avoid penalties The math checks out unfortunately - self-employment tax is just brutal when you're not used to it!