Self Income Tax Rate is 15%, So why set aside twice that?

[CalBayArea2]

If the self income tax rate is around 15%, why would I need to set aside 35% of the income? Is it because it varies based on the amount?

I read this online:
"You will need to save a significant amount of your income given that self-employment taxes total 15.3%. You should expect to put aside 30-35% of your income for taxes."
It seems contradicting?

Thanks

 

[Taxing Matters]

When you are self-employed, you have federal income tax to pay on that income. For a single person the marginal tax rates for that range from 10% to 37%. The exact rate that you end up paying will depend on your taxable income. It could well be that it is 15%. But that is not all you have to pay. You also have to pay self-employment (SE) tax. SE tax is how self-employed people pay their FICA taxes (Social Security and Medicare). SE tax is 15.3% of your net income from self-employment (after an adjustment that I won't get into here). So now you are up to about 30% of your earnings in tax. Add on top of that your state income tax, too (assuming you are a resident of a state that has an income tax). So you could easily have to set aside about 35% of your income for this. Of course, your taxable income is less than your gross income. You will get at least a standard deduction from your gross income.

 

[CalBayArea2]

When you are self-employed, you have federal income tax to pay on that income. For a single person the marginal tax rates for that range from 10% to 37%. The exact rate that you end up paying will depend on your taxable income. It could well be that it is 15%. But that is not all you have to pay. You also have to pay self-employment (SE) tax. SE tax is how self-employed people pay their FICA taxes (Social Security and Medicare). SE tax is 15.3% of your net income from self-employment (after an adjustment that I won't get into here). So now you are up to about 30% of your earnings in tax. Add on top of that your state income tax, too (assuming you are a resident of a state that has an income tax). So you could easily have to set aside about 35% of your income for this. Of course, your taxable income is less than your gross income. You will get at least a standard deduction from your gross income.

Okay, so the 15.3% I keep seeing, is only referring to FICA Taxes (SS & Medicare)? Then there's a separate general federal tax rate that is based on the amount of income?

+California's wonderful state taxes. So 3 different taxes in total essentially?

 

[Taxing Matters]

Okay, so the 15.3% I keep seeing, is only referring to SE Tax?

Yes, the 15.3% rate referred to there is only SE tax. It does not include the federal and state income taxes.

Then there's a separate general federal tax rate that is based on the amount of income?

+California's wonderful state taxes. So 3 different taxes in total essentially?

Right, you have to also pay those taxes, too.

 

[justalayman]

Okay, so the 15.3% I keep seeing, is only referring to FICA Taxes (SS & Medicare)? Then there's a separate general federal tax rate that is based on the amount of income?

+California's wonderful state taxes. So 3 different taxes in total essentially?

there are about 7 states that do not have state income taxes. That would mean there are 42 other states where an independent contractor would essentially pay those same three taxes the same as one does in California.

 

[Taxing Matters]

there are about 7 states that do not have state income taxes. That would mean there are 42 other states where an independent contractor would essentially pay those same three taxes the same as one does in California.

41 states and DC have a broad based income tax. Seven have no income tax and two states have a tax that just hits interest and divident income. But that does not mean all those 41 states and DC are all the same. Each one has different tax rates and different rules about what income is included in the tax base and what deductions and credits are allowed. California happens to be the state with the highest income tax hit. Its top rate is the highest at 12.3%. Contrast that with Pennsylvania's 3.07% rate on the other end and the others are somewhere in between.

Of course the income tax is only part of the state’s tax picture. They may also impose sales taxes, property taxes, and various excise taxes. In most rankings of tax burden, California regularly shows up among the states with the highest taxes. Taking into account what the state and local taxes are can be an important factor in deciding where to live, especially when deciding where to live for retirement when you may be living on a fixed income. Choosing a lower tax state can save you a lot of money over the years.

 

[justalayman]

The op made the very simple statement

California’s wonderfulnstate taxes. So three different taxes in total essentially?


My response was simply to inform the op the three taxes is the norm in the US and not the exception.

 

[FlyingRon]

And in many states, local counties may have income or sales tax in addition to the state. For instance, in MD, you pay a county tax (almost always 50% of the state income tax) with your state return to go to the counties. NY City has an income tax (even on non-residents) who work there.
Down here in NC and VA, most of the counties fund themselves on property tax (real and personal). Amusingly, former Virginia governor Gilmore ran on the platform of abolishing the "Car Tax" which was a name for the personal property tax on cars. This was an interesting trick because the tax was a local (county or independent city) tax. What happened was the state rebated (a portion of) the tax. Where they took this from was certain state aid to counties (primarily education being the big loser) to pay for it.

 

[Taxing Matters]

My response was simply to inform the op the three taxes is the norm in the US and not the exception.

I get that, but your response also gave an impression (perhaps not intended) of all those states being pretty much the same taxwise, and they are certainly not any where close to being the same.

 

[justalayman]

Of course each state sets its own rates. I didn’t read ops statement to refer to the amount of tax but more that the essentially three taxes was what was their point.