Why do you pay 30 percent in self-employment tax but when you were employed by a company you only paid 16 percent?

Answer 1

Self-employmened people have to pay basically double of what a "regular" employee would pay. Here's why: When you work for someone else, the company pays half of the social security, etc. taxes. However, when you work for yourself, you are essentially the employee AND the employer; thus, the 30% income tax. It truly isn't fair, especially for small businesses or independent contractors, but that's the tax law. Right idea...the self emplployment tax means you pay the tax the employer normally would. That is the 7.65% of the total 15.30% FICA, etc. that the employer would pay. So where the percentages your coming up with are derived I have no idea. True, there are different caps on amounts that are FICA, etc., taxable....and different considerations about what is taxable income (401K contributions, etc.), so you can't just take your total earnings and divide by your FICA contribution, but even so, for most people it still should be close to that 15% ---- And I absolutely believe this is a fair rule...the tax is 15.30 for SS/FICA and the health component on the applicable earnings, maxed at around 93K of earnings....it is an insurance benefit covering the worker - should the premium make any difference if it's split between employee and an employer or just by the self employed person? Each gets the same benefit paid to them at the end - or perhaps the self employed only deserve half of the normal social security paynebts on retirement? Are you suggesting one should have to contribute less...because they work for themselves? These frequently are the same people with no retirement plan of their own...(everything back into the business), except for the earnings from it they skim. Note self employeds normally don't have to pay, (or have paid for them by the employer - which as part of payroll expense just means the employer gives the employee less to compensate), Unemployment and other things like that, so they still pay less than employees. BUT REMEMBER SELF EMPLOYMENT TAX IS 7.65%....anything else requires a review.