Friday, June 15, 2007

Self-Employment Tax Defined

If you're self-employed, you are taxed slightly differently than if you have an employer. Self-employed people pay self-employment tax of 15.3%, of which 12.4% is for Social Security and 2.9% is for Medicare. If you're employed by someone else, the employer pays half of this 15.3% and you see the other half deducted from your paycheck. If you're self-employed, you pay all of it. It doesn't seem like a huge deal at first, but on 100,000**, it's roughly an extra $7650 of taxes that a self-employed person pays that an employee doesn't.

Is self-employment tax fair? Probably. Is it painful? Absolutely. And it's important for people who are self-employed to charge accordingly.

*At least on the first 94K that you earn
**This figure is not my income. The math is just easier with 100,000.