Why do I pay higher taxes being self employed than when I was working for a corporation.

Answer by Wray Rives:

Self-employed individuals might pay more tax for the same pay. The biggest tax difference between self employment and working as an employee is self-employment tax, income tax rates are the same for the same taxable income.

FICA/Medicare tax

When you are an employee you pay 7.65% FICA and Medicare tax and your employer pays a matching amount for a total 15.3% combined FICA/Medicare tax.

As a self-employed individual you are both employee and employer so you pay both parts of the FICA/Medicare tax for a total combined self employment tax rate of 15.3%.

Self-employment is not all bad

The one break you get being self-employed individual is you pay based on your net profit. When you are a W2 employee, you pay payroll tax based on your gross pay.  When you are self employed business expenses will reduce both your taxable income and your self employment tax. Employees are limited to taking un-reimbursed business expenses as itemized deductions. W2 employees typically find it is pretty difficult to get a tax deduction for un-reimbursed expenses due to limits on itemized deductions.

When you are self employed, all of your deductible business expenses will reduce your income, because they are a direct write off taken on Schedule C. You may even get to deduct some of the expenses to maintain your home, if you qualify for a home office deduction.

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