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Why Do Self-employed Pay Double Taxes?

Self-employed individuals may feel like they’re paying “double taxes” because they’re responsible for both the employer and employee portions of certain taxes.

Here’s why it can feel that way…

  1. Social Security and Medicare Taxes (Self-Employment Tax) –
    • Employees and employers each contribute to Social Security and Medicare taxes (collectively known as FICA taxes) through payroll deductions. For employees, these taxes are typically withheld from their paychecks, and the employer also contributes an equal amount.
    • However, self-employed individuals are responsible for both the employer and employee portions of these taxes, known as the self-employment tax. This tax is calculated on net earnings from self-employment and is separate from income tax.
    • The self-employment tax rate for 2022 is 15.3% of net earnings, consisting of 12.4% for Social Security (up to a certain income threshold) and 2.9% for Medicare. Self-employed individuals can deduct half of their self-employment tax as an adjustment to income on their personal tax return.
  2. Income Taxes –
    • In addition to self-employment tax, self-employed individuals are subject to federal and state income taxes on their net earnings from self-employment.
    • Income taxes are separate from self-employment tax and are based on taxable income, which includes net earnings from self-employment after deductions and exemptions. Self-employed individuals are responsible for paying income taxes on their net earnings at their applicable tax rates.

While it may feel like self-employed individuals are paying “double taxes” because they’re responsible for both the employer and employee portions of certain taxes, it’s important to recognize that self-employment taxes and income taxes serve different purposes and fund different programs.

  • Social Security and Medicare taxes fund the Social Security and Medicare programs, which provide retirement, disability, and healthcare benefits to eligible individuals and families.
  • Income taxes fund various government programs and services, including national defense, education, healthcare, infrastructure, and social welfare programs.

While self-employed individuals may face higher tax obligations compared to employees, they also have access to certain tax deductions and benefits that can help reduce their overall tax liability. Self-employment offers flexibility, autonomy, and potential tax advantages, such as deductions for business expenses and retirement contributions. It’s essential for self-employed individuals to understand their tax obligations, plan accordingly, and consider working with a tax professional to optimize their tax situation.