Net Earnings from Self-Employment Calculation

Course: Retirement Planning
Lesson 2: Qualified Plan Advantages and Disadvantages for Employees and Business Owners

Student Question:


On the Contribution base example, it states, “Net earnings from self-employment (NESE:) $140,000 x .9235 = $129,290”. Where did the .9235 come from? I’m sure it was in a previous lesson, I just can’t remember.



Instructor Response:

Hi Megan,
Good question!  This factor is part of the Internal Revenue Code and my suspicion is that it is intended to slightly reduce self-employment taxes for the self-employed taxpayer. 
The net effect of the .9235 multiplication is to reduce ESE (earnings from self-employment) by 7.65% to derive NESE (net earnings from self-employment).  Self-employment tax is calculated based upon NESE.  Interestingly, 7.65% is the total of the Social Security Tax (6.45%) and the Medicare Tax (1.45%).
Onward and Upward,