Self-employment is a wonderful thing: You have independence, you’re your own boss and you can pretty much make your own rules … unless it means dealing with the IRS. Unfortunately, self-employment also comes with its own taxes to pay that your employer would otherwise cover if you were a fulltime worker for a company. Here’s what they are, what they mean and why they suck.
Social Security tax. Technically you’d have to pay this as an employee as well, but you’d only pay 6.2 percent of it. As a self-employed person, you are responsible for the full 12.5 percent of the Social Security tax—but only up to $118,500 of your net profit. If you’re even richer than that, the rest isn’t subject to this. (And if you are, please give us all of your secrets.)
Medicare tax. Fulltime employees would only have to pay 1.45 percent, but as a freelancer or independent contractor, you have to pay a full 2.9 percent, as well as a 0.9 percent Medicare surtax.
Of course, the bright side of doing your taxes as an independent contractor means you have a lot more potential writeoffs than you would otherwise, so for many people, self-employment taxes end up balancing out. You may want to go over everything with your accountant to see what option is best for you if given the chance to become a fulltime employee of a company that you’re contracting for.