How does Lunafi calculate your estimated tax liability?

The tax bill for self-employed people has three parts. Lunafi calculates estimates for all three and provides an estimated tax liability for the year.

Lunafi needs to have you classify all your business earnings and expenses and fill out the short Tax Profile questionnaire in the app to create a better tax liability estimate.

Self-employment Tax

Self-employment tax is calculated based on your net earnings from self-employment. This amount is then multiplied by the self-employment tax rate to determine the amount of self-employment tax you owe.

The self-employment tax rate is 15.3%, 12.4% for Social Security, and 2.9% for Medicare.

Lunafi determines your gross income from self-employment to calculate your net earnings and subtracts any business expenses. The resulting amount is your net income from self-employment.

To get an accurate self-employment tax estimate, make sure to classify all of your business expenses and earnings in the app.

If you also have a W2 income, your employer is responsible for paying half of the social security tax. In this case, you will be liable for less Self Employment Tax.

Federal Income Tax

The marginal rate will depend on your income tax bracket, which ranges from 10% to 37%. These rates are adjusted each year according to the inflation rates.

Lunafi applies the following deductions* to your gross income to calculate your taxable income.

  • Standard deduction (Your filing status determines the amount.)
  • QBI (Qualified Business Income) deduction: 20% of your business income is deducted from your gross income.
  • Self Employment Tax deduction: 50% of your self-employment tax
  • Payments made for Self-Employed health insurance plans
  • Contributions to HSA, traditional IRA, or retirement plans.

*There may be other tax credits you can qualify for, which results in less taxable income.

State Income Tax

State income taxes work similarly to federal income tax but usually with lower tax rates. Some states do not have any state income tax at all.

The tax deductions can be varied depending on which state you are in, so Lunafi takes the standard deduction and tax brackets only into account when calculating your state income tax.

Total Estimated Tax Liability

Your estimated tax liability is the total of Self Employment Tax, Federal Income Tax, and State Income Tax. The calculation adds that amount to your total income if you entered an amount bigger than zero for W2 wages in the Tax Profile. Don't forget that your employer already withholds an amount for income tax from your paycheck.

Tax Rate

Lunafi calculates a tax rate as your total tax liability divided by your total gross income. This rate aims to help you decide what portion of a payment you may want to put aside for taxes.

Many things affect the taxes you owe to IRS at the end of the year, and the Lunafi estimate may differ from your actual liability in your case. Lunafi does not provide a tax preparation service.