How is taxable income calculated for self-employed individuals?

The calculation of taxable income for self-employed individuals is fundamentally based on the principle of determining the income that remains after accounting for necessary and relevant expenses incurred in earning that income. Total income refers to all income generated from the self-employed activities over a specific period. Allowable expenses encompass the costs directly related to the business operation, which are recognized as necessary for the production of that income, such as supplies, business travel, and other operational costs.

By subtracting allowable expenses from total income, the figure obtained represents the net income that is subject to taxation. This method ensures that only the profits—funds that remain after covering the costs of running the business—are taxed, promoting fairness in the taxation system for self-employed individuals.

In contrast, adding gross income to non-taxable income would not provide a relevant measure for taxable income since it would incorrectly include amounts that are not subject to tax. Similarly, calculating taxable income based on net income plus deductibles does not accurately reflect the self-employed individual’s actual earnings, as it overlooks the concept of expenses directly linked to the business operation. Finally, using defined earnings minus personal allowances would improperly mix concepts, as personal allowances pertain to individual tax calculations rather than business income evaluations. Thus, total income minus allowable