What's the Difference Between Net Profit and Taxable Income for the Self-Employed?

If you're self-employed, your net profit from the business and the amount you actually pay taxes on are two different numbers. Net profit is simply your business revenue minus your business expenses — it's what you calculate on Schedule C. But before you pay income tax on that amount, you can subtract half of your self-employment tax from it as an above-the-line deduction, which lowers your AGI. You may also be able to deduct contributions to a SEP-IRA, solo 401(k), or self-employed health insurance premiums, all of which further reduce the income you're taxed on. The result is your taxable income from self-employment, which is lower than your net profit. Understanding this chain of deductions is important because many self-employed people overestimate their tax bill by only thinking about their gross profit rather than their final taxable income.