Working for yourself is liberating—and extraordinarily expensive. You face steep tax bills, have to buy your own health and disability insurance, and need to fund retirement with no help from an employer. Add it all up, and the numbers start to look ugly.
Tempted to join America’s 15 million self-employed? Here is a reality check:
Imagine you are single, you claim the standard deduction and one personal exemption, and you have $100,000 in annual income.
If you are self-employed, you would have to cough up $30,582 to Uncle Sam, thanks to a combination of federal income taxes and Social Security and Medicare payroll taxes, according to the 1040 Tax Estimator for 2015 at Dinkytown.net, a website specializing in financial calculators.
By contrast, you would need to pay $25,869 in federal taxes if you were somebody else’s employee, $18,219 as a retiree living off traditional retirement accounts such as an individual retirement account or 401(k), and $7,838 as a retiree drawing down a regular taxable account where every dollar was taxed at the long-term capital-gains rate. (I’m assuming our hypothetical retirees are in their early 60s and don’t benefit from the slightly larger standard deduction available to folks age 65 and older.)
Why do you pay the federal government so much more if you are self-employed? The big difference is the payroll tax, which accounts for $14,130 of the $30,582 tax bill. If you work for somebody else, your employer pays part of the payroll tax, so your portion would be just $7,650. Retirees, for their part, don’t pay the payroll tax, because they don’t have earned income.
Chosen excerpts by Job Market Monitor. Read the whole story at The High Cost of Being Self-Employed – Total Return – WSJ.
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