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 donā€™t 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.

FieldCalculation
1099IncomeTotal 1099 income
ssaIncomeTotal of social security income
effectiveTaxRatetotalTaxes / 1099Income
expenseDeductionTotal expenses deducted
federalIncomeTaxFederal income tax on 1099 income + selfEmploymentTax
federalTaxOutstandingfederalIncomeTax - (irsPayments + otherIrsPayments)
federalTaxTotalTotal federal taxes for year to date
filingStateState where taxes are to be filed, this impacts calculations
filingStatusFiling status of an individual (single, married, etc)
irsPaymentsSum of IRS tax payments for an individual in a given year
quarterlyPaymentsduplicate of irsPayments (this field will be deprecated)
marginalTaxRateTax rate on each marginal dollar of income (both state and federal rate) received.
medicareTaxFederal rate of medicare tax on 1099 income (with an income threshold)
mileageTotal mileage
mileageDeductionFederal tax deduction rate based on total mileage
otherIrsPaymentsTax payments submitted to the IRS outside of AboundĀ®
otherStatePaymentsTax payments submitted to the state outside of AboundĀ®
otherTaxWithholdingsSum of tax withholdings outside of AboundĀ®
qbiDeductionQualified business income deduction
selfEmploymentTaxsocialSecurityTax + medicareTax
smartTaxRateA dynamically adjusting percentage rate based upon the user's outstanding tax liability.
socialSecurityTaxFederal rate of social security tax on 1099 income (with an income threshold)
stateIncomeTaxstate income tax on 1099 income
stateTaxTotalTotal state taxes for year to date
taxBalancetaxTotalOutstanding - (taxWithholdings + otherTaxWithholdings)
taxWithholdingssum of tax withholdings for an individual in a given year
taxWithholdingsPendingsum of tax withholdings that are pending (only applicable for AboundĀ® tax withholdings inside AboundĀ®)
totalTaxfederalIncomeTax + stateIncomeTax
w2IncomeTotal W-2 Income
yearYear 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. Thatā€™s 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.

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