Starting a New Business - Beware the Self Employment Tax

All new unicorporated business owners should watch out for the self employment tax (S/E tax). It is 15.3% of 92.35% of your net business income after health insurance and is meant to cover your social security and medicare that you and your employer would have paid on your W-2 wages if you were not self employed. You do get to deduct one-half of the tax as an adjustment for adjusted gross income. However, I've seen many situations where the taxpayer has negative taxable income due to large itemized deductions and owes no income tax but still owes the self employment tax on the net income of the business. To say the taxpayer is surprised is an understatement. Watch out.