- 1). Determine your self-employment taxable income. The Internal Revenue Service's Schedule SE is a worksheet used to calculate how much self-employment income is taxable. This schedule will be used in conjunction with Form 1040 and Schedule C.
- 2). Take the reduction in your self-employment income. As of 2009, the IRS allows for a 7.65 percent reduction in your self-employment income before applying your corresponding tax rate. For instance, $30,000 in self-employment income reduced by the IRS's allowable 7.65 percent exempts $2,295 and the new self-employment income is $27,705---to which Social Security and Medicare taxes of 15.3 percent are owed.
- 3). Claim the amount you pay in self-employment tax (15.3 percent) as a tax deduction on Form 1040. The IRS allows a full 50 percent of the taxes you pay in self-employment to be deducted from your adjusted gross income.
For example, on $30,000 self-employment income, after paying 15.3 percent in Social Security and Medicare taxes on your reduced income exemption ($30,000 in self-employment income times 7.65 percent exemption equals $27,705. The new self-employment income of $27,705 times 15.3 percent in SS and Medicare taxes equals $4,238.87. You would take half of the $4,238.87 paid in self-employment tax and claim $2,119.43 as a deduction on Form 1040). - 4). File your self-employment taxes. The IRS provides e-file services for self-employed taxpayers on its website or you may mail in your self-employment taxes to the appropriate IRS office.
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