Self-employed? The less you make, the MORE they take in taxes.

[BWdem4life]

My final client of the 2023 tax season was kind of a pain. A self-employed house cleaner, she complained and complained all the way through the interview. I did my best to sympathize with her - I had been self-employed myself for a number of years, and I remembered how onerous the self-employment taxes had seemed at the time. I had also had my taxes done professionally once - ONLY once - and I still remember the sticker shock there.

The next day, I had some free time and decided to do a little analysis with the tax software - putting in different figures for both scenarios, wage-earner vs. self-employed. I expected to see higher taxes for self-employed people, of course. But I expected that those extra taxes would be more or less the same percentage-wise among all income groups. Or, maybe they would even be lower for lower-income people when taking Earned Income Credit into account.

So, I was completely taken aback when I realized the reality of the situation.

The first chart shows the difference in SS/Medicare taxes and Federal taxes between the two groups. Self-employed people pay more in SS/Medicare taxes, but less in Federal taxes. Overall, they pay more. The first clue that something was wrong came at the $60,000 mark - a self-employed person making 60K paid LESS in additional taxes than someone making $55K. Even worse - a self-employed person making $70,000 paid less in additional taxes than a self-employed person making $25,000 (!!!)



The second chart made it even clearer. It was eye-popping. A self-employed person making only $5,000, while paying "only" $353 in total taxes, paid a whopping 7.1% more taxes than a wage-earner making the same $5,000. Meantime, a self-employed person making $70,000 paid only 1.7% more than the comparable wage-earner.



If that seems backwards, it's because... it is.

So, "the more you make, the more they take"? Not if you're self-employed.

This regressive tax system desperately needs to be changed, especially with more and more people being forced into the "independent contractor" role by companies who don't want to pay the employer share of Social Security and Medicare taxes anymore.

[progree]

1. I thought SS/Med was exactly twice as much for the self-employed as the wage earner

Last edited Thu Apr 20, 2023, 12:04 AM - Edit history (1)

Social Security: 6.2% for the wage earner, 12.4% for the self-employed
Medicare: 1.45% and 2.90%
Total SS+MC: 7.65% and 15.3%

Edited to add I see there's a crosspost with some more discussion. https://www.democraticunderground.com/100217843123

[BWdem4life]

2. Not exactly.

Current tax law has them paying 15.3% on 92.35% of their net income. Then half of that 15.3% gets deducted from their total income. Finally, a qualified business income deduction also is deducted from total income. After the standard deduction or itemized deductions, the rest is taxable.

[progree]

4. Oh well. Maybe I'll have luck with the federal income tax part of it --

Last edited Thu Apr 20, 2023, 12:55 AM - Edit history (1)

Is this for example, for a single person, taking the standard deduction, no children no dependents? So that once in an income range that is above where the EITC is a factor, I could simply take the income, subtract the standard deduction to get the taxable income, and then enter that into the tax tables? Thanks.

Edited to add Looks like I've duplicated your wage earner at $50,000 and $60,000. (Single, standard deduction).

I had no idea the self-employed paid a lot less in INCOME tax, or frankly any less, so I've some learnin' to do. I'm retired and have a lot of income, none of it "earned" and ultimately it comports to some simple calculations using the tax tables.

[questionseverything]

3. It's bs that self employed pay more than employees to start with

[IbogaProject]

7. It is the dark regressive side of social security

Remember FDR was a millionaire and his Social Security scheme left the burden on the workers themselves. It has an effect of pulling money from every zip code and returning it to a very select set of rich areas via health care and the military budget.

[progressoid]

5. very interesting.

As a self employed person, this is fascinating.

[IbogaProject]

6. And don't forget the ACA shifts and Rolloffs

The 2017 GOP Trump tax cut scam has many ticking time bombs for every odd tax year through 2027. They made the cut that lowered the LLC pass through rate lower permanent and put in all kinds of hidden hikes to reduce the stated cost. They also put in a temporary small biz credit that is being cut gradually. So T45 pays less than your house cleaner.
There is also a punishing set of cliffs and Rolloffs of the ACA in that whole range. New York State used to have a very nice affordable health plan for the self employed. When the ACA came in Governor Coumo decided to take the money and closed the plan. There is a window of pain above 40 some thousand where the extra income is nearly if not completely consumed by taxes and ACA Rolloffs. Society says a Type 1 diabetic should just die the way this is all arranged.