How is business income self-employment tax calculated?

The calculation of self-employment tax is specifically designed to ensure that self-employed individuals contribute to Social Security and Medicare programs based on their income. To determine the amount subject to self-employment tax, net earnings from self-employment are used.

Net earnings are defined as gross income from self-employment minus allowable business expenses. However, for self-employment tax purposes, only 92.35% of net earnings are subject to the tax calculation. This percentage accounts for the exclusion of a portion of the self-employment income, reflecting that self-employed individuals can deduct a portion of their self-employment tax when calculating their taxable income.

Therefore, multiplying net earnings from self-employment by 92.35% provides the correct basis for calculating the self-employment tax, ensuring that the calculation aligns with IRS guidelines. This approach protects self-employed individuals by allowing for a small adjustment, ultimately affecting their contributions toward Social Security and Medicare.