[skittles]

The self employed pay 15.3% of gross income to FICA and Medicare taxes. This amount cannot be avoided (no tax breaks). Employees pay roughly half this percentage. It's also very easy for the newly self employed to see the money rolling in and spend it. One has to be disciplined enough to set aside enough for taxes in a separate account.

[dragonwriter]

> The self employed pay 15.3% of gross income to FICA and Medicare taxes. This amount cannot be avoided (no tax breaks). Employees pay roughly half this percentage.

Everyone, effectively pays 15.3% of gross SS-covered wages up to $113,700 and 2.9% on income above that.

If you aren't self-employed, exactly (not "roughly") half of that (the so-called "employer's share") is not directly visible, while half of it is reflected in payroll deductions.

[hobs]

Yeah, most people dont know about ER taxes because they dont have to pay them until they are self employed.

[stirno]

This isn't necessarily true. Its fairly common to have an S-Corp (or LLC filing as S-Corp) dodge a significant chunk of the self-employment tax by paying a lower salary and then shareholder distributions for the rest.

Balance is important here as the IRS watches these situations closely, but any decent accountant should help someone down this path.

[stevenwei]

On top of this, if you are making any significant amount of money as a self-employed individual you should probably look into setting up a solo-401k or a SEP-IRA, which will help reduce your taxable income (by up to $51,000 for 2013).

[skittles]

After looking into this, it looks like the IRS will ding you if you pay yourself less than what it would take to hire someone to do the same job.

[stirno]

The IRS will, effectively, value your job in the event of an audit and determine whether you paid yourself reasonably compared to your market for your skills, experience, etc.

I had prepared an example that showed you could actually pay less in FICA, while still being reasonable in the eyes of the IRS. Maybe not ideal to post it here though.

[a8da6b0c91d]

How do those CEOs with $1 salaries get the all clear? Their compensation is all capital gains, yeah?

[Romoku]

Long term capital gains is less than the alternative minimum tax. Executive compensation probably consists of a mixture between stock options and company paid expenses (airfare, company car, vacations, travel, nice office equipment, etc).

[lmm]

Maybe the IRS determines that's the market rate for their skills :P

[derekp7]

If the majority of CEOs do this, then that is the typical compensation of CEOs. So they get away with it because they all do it.

[TheEzEzz]

I believe this only applies to S-corps, in order to prevent abuse of the pass-through taxation S-corps enjoy. IANAA though.

[petercooper]

I always found the US self employment tax curious and wondered if it dissuaded people from being self employed if they had the choice (even setting aside the health insurance situation).

Here in the UK, the self employed pay less (9% vs 12%) in the equivalent tax (called National Insurance here) than the employed, with the tradeoff being that they can't claim various state unemployment benefits (for obvious reasons).

[nathanbarry]

From what I've heard people fear the complexity, not the increased rates. Also it's hard to get health insurance or a mortgage when self-employed.

[griffordson]

It used to be hard to get insurance. That changes in a couple days. It is rude to claim the ACA does anything to help anyone, let alone business owners, but I'm certainly happy that I'll be getting oppressed by Obamacare in the new year.

[nathanbarry]

I had a super easy time getting insurance when I moved to self-employed. But that is something a lot of people are scared of. That is a nice thing about the ACA, you don't have to worry about that.

But I am annoyed my insurance costs are going up by quite a bit, but in the grand scheme of things I still pay very little.

[stirno]

If you setup your company correctly, this is often the case for self-employed people in the US as well.

[petercooper]

Yeah, I was speaking entirely from a self employed perspective, although the semantics get tricky with incorporation. In the UK, though, you can do a similar thing where you incorporate, pay yourself under the level where you have to pay National Insurance (there's a free allowance), and then pay the remainder using dividends (which attract no NI), so you can theoretically reduce your exposure to these types of taxes to nil.

[zefhous]

To be more precise, my understanding is that it's not gross income, but net profit. So, expenses are not taxed.

Also, 92.35% of that profit is taxable, and as dragon writer said you stop paying FICA at $113,700 and then you play only 2.9% for Medicare.

Here are examples of self-employment tax at different levels of income:

    $100,000 - $14,129.55 in taxes, an effective rate of 14.13%
    $200,000 - $19,455.10 in taxes, an effective rate of 9.73%
    $300,000 - $22,133.25 in taxes, an effective rate of 7.38%