I worked as a regular employee (laid off in August) and as a consultant in 2012. I entered my W2 and itemized deductions such as mortgage interest and real estate taxes. Because I received a severance check last year that was taxed at a higher rate, my return was projecting at almost $7800 in TaxAct.com.

But after I added my 1099 Nonemployee compensation (box 7) of $13,750 my refund dropped dramatically to less than $2900. What gives? From what I can tell, the tax rate should be somewhere in the range of 13-15%, not 35%! Am I missing something? I am still well below 100K in total earnings for 2012.

“But after I added my 1099 Nonemployee compensation (box 7) of $13,750 my refund dropped dramatically to less than $2900. What gives? From what I can tell, the tax rate should be somewhere in the range of 13-15%, not 35%! Am I missing something? I am still well below 100K in total earnings for 2012”==============>First of all, as you can see, as long as the amount on Sch SE line 2 / 3 is $400 or exceeds $400 then you must pay SECA tax;for example, say the amopunt on Sch C line 29/31 is $7K,then you need to pay SECA tax of $860 and deduct $494 on 1040 line 27.so by adding your self employment income, your net tax liability goes up by$366;$860-$494 in this scenario. the 2010 Tax Relief Act reduced the self-employment tax by 2% for self-employment income earned in calendar year 2011. The self-employment tax rate for self-employment income earned in calendar year 2011 is 13.3% (10.4% for Social Security and 2.9% for Medicare). The Temporary Payroll Tax Cut Continuation Act of 2011 extended the self-employment tax reduction of 2% for calendar year 2012 so the rates for 2011 remain in effect for 2012. For self-employment income earned in 2010, the self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).However, you can deduct the employer-equivalent portion of your self-employment tax in figuring your AGI. This deduction only affects your income tax. It does not affect either your net earnings from self-employment or your self-employment tax.

Thanks so much for the reply. I believe what you're saying is I pay 13.3% SECA taxes IN ADDITION TO federal taxes? So the total tax rate of 35%+ on my nonemployee compensation is probably valid?

“I believe what you're saying is I pay 13.3% SECA taxes IN ADDITION TO federal taxes?”========>Correct; however, as I said previously, you can deduct 50% of your SECA tax on 1040 line 27. Your income on 1099 reported on 1040 line 12 needs to be taxed at your marginal tax rate for fed/state returns.
“ So the total tax rate of 35%+ on my nonemployee compensation is probably valid?=====>I should say it depends. I mean by adding your income on 1099, $13,750, to your 1040, you need to refigure the amounts reported on 1040 line22, 37&38, 43, 44 and 61 and 72.For example, yur income on 1099 reported on Sch C line 29/ 31 needs to be reported on 1040 line 12 and is taxed at your tax bracket(so as long as your tax bracket is 35%, it ‘d be taxed at 35% or so on).