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How to Calculate your Self-Employment Tax and Solo 401k Contribution

I spent Saturday watching episodes of 24 season 2 and recovering from my wild birthday outing. Saturday was absolutely unproductive, so I made up for it today. I sat down and filed both my state and federal taxes. The best part is I didn’t pay a penny to efile (I filed my federal with TaxAct and state at the Illinois tax site. The filing process would have been a breeze if it wasn’t for my self-employed tutoring income. I had no idea how my taxes would look, since I didn’t make quarterly estimated payments. Additionally, I didn’t know how much I would be able to defer into my Vanguard solo 401k. IRS publication 560 was supposed to be my reference, but I found it extremely confusing and I didn’t find a good reference online. So for all of you people earning a small side income as a self-employed individual, here’s a guide for how I handled my self-employed taxes.

Net Profit

Net profit (or loss) is pretty simple, on the Schedule C form you enter your income and expenses and subtract them.

net_profitMy income was solely from tutoring, as I haven’t made any money online yet. My expenses consisted of the standard mileage rate for driving to and from tutoring. The net profit goes on line 12 of Form 1040.

Self-Employed Tax and Deduction

After calculating your net profit, the next step is calculating the self-employed tax, which I did on Section A of the Short Schedule SE form. The first step is to by multiply your net profit by 92.35%, to determine your net earnings.  The self-employed tax is found by multiplying your net earnings below $102,000 by 15.3% and your net earnings above $102,000 by 2.9%. The deduction for 1/2 of your self-employment tax is simple, it’s half of your self-employment tax.

self_employed_taxThe self-employment tax goes on line 57 of Form 1040. The deduction for 1/2 of your self-employment tax goes on line 27 of Form 1040.

Solo 401k Contribution

Calculating my solo 401k contribution was the only new part of my tax filing this year, and it was the most confusing. IRS Publication 560 has a Deduction Worksheet for Self-Employed. The example that is provided within the publication does not utilize elective deferrals, which is all I will be contributing as my net profit is not greater than $15,500. I had a hard time following the worksheet, but now that I’ve completed the worksheet, I can explain it significantly easier for those of you in a similar self-employed income range.

Subtract the self-employed deduction from the net profit. That’s it! Now, it is much more difficult to calculate the contribution amount if you contribute more than just elective deferrals, which I hope to do next year.

solo_401k_contributionNow that I have my Solo 401k contribution nailed down, I can officially set the target for my goals, which I will update. As soon as I set up my Vanguard Small Business account, I can make contributions to my Vanguard Individual 401k. Vanguard has a great contribution calculator to check your math.

Has anyone else had any trouble with self-employed taxes?

Random Thought

The NFL scouting combine is the beginning of the NFL offseason for me. I always get really excited when free agency starts and the NFL draft is approaching. The NFL season is right around the corner!

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Posted in Retirement, Self-Employed, Taxes.

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5 Responses

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  1. Miriam says

    I recently came across your blog and have been reading along. I thought I would

    leave my first comment. I don’t know what to say except that I have enjoyed

    reading. Nice blog. I will keep visiting this blog very often.


  2. Steve says

    @Miriam, I’m glad that you have enjoyed my blog. I hope to see some more comments in the future. I welcome any opinions on all of my posts.

  3. me3 says

    Thanks for this article. I’ve been looking for something along these lines for a long time. I’ve done a little bit of freelance this year but didn’t register formally with any institution. Have you done so? How would doing so affect my tax rate and thus my Solo 401(k) contributions?

  4. Lindsay says

    The main trouble I have with self-employment taxes is you end up paying way too much. :P It can be worth incorporating (LLC anyway) to save a bit.

  5. Juggles says

    Great explanation, helped a lot. I chose TD Ameritrade for the Individual 401K because
    they allow loans. Make sure whatever broker you choose allows this. You never know what the future will bring.