Estimating Taxes on Self-Employment Income

I had previously mentioned that we have some self-employment income coming in soon, and that we would either have to pay estimated quarterly income tax on it or we would have to adjust our withholdings from our "day jobs" to cover the additional income tax. 

While I love getting extra money from little side jobs, it really sucks to crunch the numbers and see how little is left over. On a $4500 check, we will end up paying close to 40% in taxes! 

We're in the 25% marginal tax bracket, so there's an instant $1125 to the IRS.  It's self-employment income, which means we have to pay an additional 15.3% (12.4% is to Social Security, and 2.9% is for Medicare). And of course we also have to pay state income tax of 4.35%  - so 44.65% in taxes, right off the top! 

There are a few small deductions (when we go to file our federal tax return, the self-employment tax deduction allows us to subtract 1/2 of the 15.3%) and multipliers used in the forms (you only pay the 15.3% on 92.35% of the net income), so the actual taxes paid ends up being slightly less.  

So out of the $4500 check, we pay: 

- Federal Income Tax:  $1125

- Social Security: $515

- Medicare: $121

- State Income Tax: $196

Subtotal, Taxes: $1957

Minus 1/2 SE deduction @ 25% tax rate: $80 [0.25*(0.5*($515+$121))]

Total, Taxes: $1877

We've sometimes been able to take the home office deduction as well, and that would allow us to save an additional $150 if we can take it this year. Even so, we would end up paying $1727! It's frustrating to see so much of our hard-earned money just disappear! 

Anyways, I used the $1877 to calculate how much extra we should have withheld from our normal paychecks for the rest of the year. I ran through the math a few weeks ago, knowing that it would be effective June-December (so seven months).  $1877 / 7 = $268/mo.  We set up an additional $25/mo to go to the State, and the remainder to go to the Feds.