Tax Calculations Explained
The U.S. tax code is based upon a graduated income tax bracket system, meaning the more income you earn, the more you pay (on a percentage basis) on additional income. For example, if you earn $15,000 in one year, your first $10,000 may be taxed at 10%, while your next $5,000 may be taxed at 20%. Your marginal tax rate would be 20% (the tax rate that is owed on additional income) while your effective rate would be 13.3% ($2,000 taxes / $15,000 income).
These tax calculation measures are essential to understand, but they donāt fully capture the complexities of withholding each individual 1099 income. For example, if you were to always withhold at the marginal tax rate, you would likely withhold too much. If you were to always withhold at the effective tax rate, you would likely withhold too little.
We use the IRS tax code to calculate the correct tax brackets and deductions to get a User's taxable income.
The following provides a breakdown of the calculations for each field returned by the Taxes endpoint.
| Field | Calculation |
|---|---|
1099Income | Total 1099 income |
ssaIncome | Total of social security income |
effectiveTaxRate | totalTaxes / 1099Income |
expenseDeduction | Total expenses deducted |
federalIncomeTax | Federal income tax on 1099 income + selfEmploymentTax |
federalTaxOutstanding | federalIncomeTax - (irsPayments + otherIrsPayments) |
federalTaxTotal | Total federal taxes for year to date |
filingState | State where taxes are to be filed, this impacts calculations |
filingStatus | Filing status of an individual (single, married, etc) |
irsPayments | Sum of IRS tax payments for an individual in a given year |
quarterlyPayments | duplicate of irsPayments (this field will be deprecated) |
marginalTaxRate | Tax rate on each marginal dollar of income (both state and federal rate) received. |
medicareTax | Federal rate of medicare tax on 1099 income (with an income threshold) |
mileage | Total mileage |
mileageDeduction | Federal tax deduction rate based on total mileage |
otherIrsPayments | Tax payments submitted to the IRS outside of AboundĀ® |
otherStatePayments | Tax payments submitted to the state outside of AboundĀ® |
otherTaxWithholdings | Sum of tax withholdings outside of AboundĀ® |
qbiDeduction | Qualified business income deduction |
selfEmploymentTax | socialSecurityTax + medicareTax |
smartTaxRate | A dynamically adjusting percentage rate based upon the user's outstanding tax liability. |
socialSecurityTax | Federal rate of social security tax on 1099 income (with an income threshold) |
stateIncomeTax | state income tax on 1099 income |
stateTaxTotal | Total state taxes for year to date |
taxBalance | taxTotalOutstanding - (taxWithholdings + otherTaxWithholdings) |
taxWithholdings | sum of tax withholdings for an individual in a given year |
taxWithholdingsPending | sum of tax withholdings that are pending (only applicable for AboundĀ® tax withholdings inside AboundĀ®) |
totalTax | federalIncomeTax + stateIncomeTax |
w2Income | Total W-2 Income |
year | Year for tax calculations |
Self-Employment Taxes Explained
Self-employment tax consists of Social Security and Medicare taxes primarily for individuals who work for themselves. It is similar to Social Security and Medicare taxes withheld from the pay of most wage earners. Self-employment taxes are applicable no matter one's age and even if one is already receiving Social Security or Medicare.
The self-employment tax rate is essentially 15.3% and includes two parts that are generally subject to 92.35% of one's net earnings from self-employment:
- 12.4% for Social Security
- 2.9% for Medicare
Importantly, the Social Security portion may only apply to a part of taxable income. Thatās because of the Social Security wage base. For the 2022 tax year, the first $147,000 of combined wages, tips, and net earnings is subject to any combination of the Social Security part of self-employment tax.
All combined wages, tips, and net earnings in the current year are subject to any combination of the 2.9% Medicare part of self-employment tax. There is no limit on the Medicare portion of self-employment tax, no matter how much is earned.
An additional Medicare tax rate of 0.9% (on top of the 2.9%) applies to self-employment income levels above the thresholds below:
- Married filing jointly: $250,000
- Married filing separately: $125,000
- All other filing statuses: $200,000
The following individuals must pay self-employment tax and file a Schedule SE (Form 1040 or 1040-SR) if:
- Self-employment net earnings (excluding church employee income) were $400 or more.
- Church employee income was $108.28 or more.
Updated 4 months ago