If you are going to compare apples to apples, you need to include the full SS and Medicare taxes for both self-employed and employed.
At $5,000, an employed individual would be paying 7.65% in taxes to the two combined, not the 0% you have them paying. A self-employed person would be paying roughly 15.3%.
Beyond that it's simple math. A flat tax that applies without deduction always hits the lowest income individuals hardest becaseu ever dollar is taxed. A graduated tax (like income tax) exempts a certain amount at the low end of the scale and increases as income gets higher (i.e. the marginal tax rate is higher). As the marginal tax rate of both individuals climb, the extra kick of the 7.65% extra (roughly) paid by the self-employed individual diminishes relative to the increased percentage coming from the income tax.
As long as you accept the structure of social security (flat tax paid by everyone to create a social net for retirement), with half paid by the employer and half paid by the employee, a self-employed individual will always pay double what an employed individual will into that system.
The theory is that people who are self-employed act as the employer and the cost of that added tax should be built into the cost for services provided by the self-employed individual (just as the cost is built into the employer's business).
The reality is more complicated. There are a lot of "self-employed" individuals who really aren't self-employed. They are employees, but the employer is trying to save a buck (or a lot of bucks) on taxes - social security, specifically. I did taxes for a number of years and just doing a quick run down of how many of my "self-employed" clients were actually self-employed - I can only recall one. Most were classified that way, paid on a 1099 by their employer, but were almost certainly misclassified. Essentially, when you control the minutiae of what a worker does (rather than handing them a job and letting them figure out how to get it done) the person is an employee - not self-employed.
They could challenge their employer - would likely win. It's a simple IRS form to report that a job for which your employer did not pay social security was actually employment, not a business you set up. But doing so will almost certainly get you fired because the IRS will come down on your employer like a ton of bricks. They will owe back taxes for you (and anyone else similarly misclassified).
= new reply since forum marked as read