Yesterday I spent a good part of the afternoon attempting to estimate my tax liability for 2005 while looking ahead to 2006.

As all small business owners know, self-employment tax is a major part of your total tax liability each year. It represents 15.3 percent of your net earnings from self-employment as reported on Schedule SE.

The tax consists of two portions:

12.4% for Social Security - $11,160.00 maximum (2005).
2.9% for Medicare - no maximum.

According to the IRS, net earnings from self–employment generally represent 92.35% of your net income. eHow.com offers this equation for estimating self-employment tax:

Net Income * .9235 = Net Earnings
Net Earnings (up to $90,000 in 2005) * .124 = SStax
Net Earnings (no limit) * .029 = MCtax

SStax + MCtax = SE Tax

Assume your company earned $55,000 net income. Your estimated self-employment tax is figured as:

55,000 * .9235 = $50,792.50
50,792.50 * .124 = $6,298.27
50,792.50 * .029 = $1,472.98
$6,298.27 + $1,472.98

SE Tax = $7,771.25

Good news: you can take one half of your self-employment tax amount as a deduction against total income on your Form 1040.

Disclaimer: Tax results submitted to the IRS should be figured by a qualified accounting professional.

View the equation for figuring income tax along with tax rate brackets for 2005 and 2006.

Recommended Reading:

• IRS.gov - Self-Employment Tax Discussion
• TurboTax.com - Self-Employment Tax

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One Response to “Estimating Self-Employed Tax”

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