How to Calculate Taxes on Operating Income

Learning how to calculate taxes on operating income is important for every businessperson to know. This is the only way that you will know what your tax liability is. You must keep accurate records throughout the year so that when it is time to calculate your tax liability, you have all of your expenses and profits in order. This makes tax time easier and less stressful.

Things You'll Need

• Yearly income from sales
• Yearly expense reports
• Schedule C
• Schedule SE

Instructions

1. Take the income for the year and subtract all expenses. If you are filing your taxes, you will list expenses on Schedule C. These expenses are cost for goods, utilities, mortgage or rent, insurance, licenses, other supplies and miscellaneous expenses. Caution: It is best to have as few miscellaneous expenses as possible. Try to place each expense under the right category. After you finish the form, you will have your loss or profit.

2. Enter the loss or profit on line 12 of the 1040 form and on line 2 of the Schedule SE form.

3. Complete the Schedule SE to figure the amount of self-employment tax you must pay on the profits from your business. If you had a loss, you will not have any tax liability for self-employment taxes. Look at line 2 on Schedule SE where you entered your profit or loss. If you have a profit, go to Step 4.

4. Follow the directions on Schedule SE. If 1a and 1b apply, enter any amounts on those lines; otherwise, move to line 2 where you entered your profit. On line 3, add lines 1a, 1b and line 2 and enter the total on line 3.

5. Multiply line 3 by 0.9235 (92.35 percent) and enter this amount on line 4. If line 4 is less than $102,000, multiply line 4 by 0.153 (15.3 percent) and enter this total on line 5 and line 57 of the 1040 form. If line 4 is more than $102,000, multiply the amount on line 4 by 0.029 (2.9 percent), add $12,648 to the amount and enter on line 5 and line 57 of the 1040 form.

6. Divide line 5 in half and enter this amount on line 6 and on line 27 of the 1040 form. Then continue filling out the 1040 form to find out how much tax you owe on your operating income.

Tips & Warnings

• If you have a loss, you still have to file a 1040 form and send it to the IRS with no tax owed.

• If you have all the sales and expense records done monthly, figuring out your tax for profit and loss is so much easier.

Resources

• IRS: Federal Forms SE and C