Do independent contractors actually pay MORE in taxes than full-time employees with the same income?

So wait, I've been doing some side gigs and getting paid through PayPal but nobody ever mentioned this self-employment tax to me. Does this mean I've been underpaying my taxes?? And if I made like $10k last year on the side, how much extra should I have been paying?

If you earned $10k from side gigs, you probably should have been paying self-employment tax on that income. The self-employment tax applies when you earn $400 or more in self-employment income during the year. For $10k in side gig income, you'd owe approximately $1,530 in self-employment tax (15.3% of your net earnings), plus regular income tax based on your tax bracket. If you haven't been reporting this income, you might want to file amended returns for previous years to avoid potential penalties and interest if the IRS discovers the unreported income later.

Does that service actually work for figuring out quarterly payments? That's what I struggle with most - I never know how much to pay each quarter and I'm afraid of getting hit with penalties.

I'm skeptical about these tax services. How is this different from TurboSelf-Employed or H&R Block? Those are established companies but they still missed deductions for me.

It absolutely helps with quarterly payments. What I do is upload my income statements and expenses, and it calculates what I should be paying each quarter. It's been super accurate so far and I haven't had any surprises at tax time. The main difference I've found from TurboTax Self-Employed or H&R Block is that this actually reviews your documents and finds deductions specific to your situation rather than just asking generic questions. It caught several industry-specific deductions that TurboTax missed completely for me last year, like certain professional subscriptions and partial vehicle expenses that were business-related.

How does this actually work? I've tried calling the IRS like 5 times this month and just get a message saying they're too busy and to call back later.

Sounds like a scam. No way you can skip the IRS phone queue when millions of people are trying to get through. What are they doing, paying off IRS agents to move you up in line? I'll believe it when I see it.

It uses a system that continuously redials the IRS until it gets through, then reserves your spot in line. It's basically doing what you'd do manually if you had unlimited time and patience to keep calling back. It's not skipping the queue - you still wait your turn, but their system handles the frustrating part of getting into the queue in the first place. It's completely legitimate and doesn't involve any special relationship with the IRS. Think of it like having an assistant who keeps redialing for you until they get through, then calls you when they've established the connection. The IRS doesn't know or care how you got through - you're just another caller in their system once connected.

Can you explain more about the Solo 401k? I've heard about it but I'm not sure how it's different from a SEP IRA. Is one better than the other for independent contractors?

The main difference is contribution limits and flexibility. With a Solo 401(k), you can contribute both as an employee (up to $23,000 in 2025, plus $7,500 catch-up if over 50) AND as the employer (up to around 25% of your compensation). This dual contribution approach often allows for higher total contributions. A SEP IRA only allows the employer contribution (which is you, as a self-employed person), maxing out at about 25% of your net self-employment income. For many people, especially those with lower incomes who want to save a higher percentage, the Solo 401(k) lets them contribute more. Solo 401(k)s also offer Roth options and loan provisions that SEPs don't have.

Is the health insurance deduction really that simple? I've heard mixed things about whether you can take it if you're eligible for coverage through a spouse's employer plan.

The health insurance deduction has some restrictions when it comes to spousal coverage. You generally CAN'T deduct your self-employed health insurance premiums if you (or your spouse if filing jointly) are eligible to participate in an employer-sponsored health plan, even if you choose not to enroll in it. However, there are some exceptions - if the employer plan is only available for part of the year, you can deduct premiums for the months when you weren't eligible. Also, if your spouse's employer plan doesn't cover you specifically (only covers the employee), then you might still be able to deduct your own separate coverage. The rules get pretty complex, so it's definitely worth checking with a tax professional if you're in this situation. The IRS has specific guidelines in Publication 535 that cover all the scenarios.

This is really helpful! I'm the original poster and this breakdown makes so much more sense than anything I found online. The $2,000 extra vs $2,000 in potential deduction savings is exactly the kind of concrete numbers I was looking for. One follow-up question - you mentioned tracking everything in a spreadsheet. Do you have any tips for someone just starting out on what expenses to watch for that I might not think of? I'm worried I'll miss deductions just because I don't know they exist.

Great question! Here are some commonly missed deductions I wish I'd known about when I started: **Office/Workspace:** - Furniture (desk, chair, filing cabinet) - Office supplies (paper, pens, printer ink) - Business-only phone line or cell phone percentage - Internet service (business percentage) **Professional Development:** - Industry conferences and workshops - Professional licenses and certifications - Business books and subscriptions - Online courses related to your field **Transportation:** - Mileage to client meetings (track every trip!) - Parking fees and tolls for business travel - Public transit for business purposes **Less Obvious Ones:** - Bank fees on business accounts - Credit card annual fees (if used for business) - Professional clothing that's required for work - Business meals (50% deductible) - Software subscriptions and apps you use for work My biggest tip: set up a simple tracking system from day one. I use a basic spreadsheet with columns for date, amount, category, and description. Take photos of receipts with your phone immediately. The IRS wants documentation, so good records are crucial. Also consider getting a separate business credit card - makes tracking so much easier at tax time!

This is such great advice about setting aside money for taxes! I wish someone had told me this when I started freelancing part-time a few years ago. I made the same mistake of spending everything as it came in and then scrambled to come up with cash for quarterly payments. The state tax point is really important too - I'm in California so between state income tax and that higher self-employment tax burden, being a contractor definitely costs more here than it would in Texas. But even with the higher taxes, the flexibility and potential for higher hourly rates as a contractor often makes up for it. One thing I'd add to your savings strategy - I actually set aside 35% to be extra safe, especially in my first year when I wasn't sure how many deductions I'd actually qualify for. Better to overestimate and get money back than to come up short!

This is exactly the kind of real-world perspective I needed to hear! The breakdown of going from $1,500 to $12,000 in deductions really puts things in perspective. I'm curious about the Solo 401(k) - when you say you can put away $46,000+, is that because you're making more as a contractor than you did as an employee, or are the contribution limits just that much higher? I'm trying to figure out if the retirement savings advantage would apply even if my total income stayed roughly the same. Also, do you mind sharing what types of expenses made up the bulk of that $12,000 in deductions? I want to make sure I'm not missing any major categories when I start tracking everything.

The Solo 401(k) limits are actually based on your self-employment income, so even at the same total income level, you'd likely be able to contribute more than a regular employee 401(k). For 2025, you can contribute up to $23,000 as the "employee" plus up to 25% of your net self-employment earnings as the "employer" - so on $65,000 in contractor income, you could potentially put away around $39,000 total (depending on your exact net earnings after the self-employment tax deduction). As for my $12,000 in deductions, here's roughly how it broke down: - Home office (20% of rent/utilities): ~$4,200 - Business equipment/software: ~$2,800 - Professional development/conferences: ~$1,500 - Business travel/mileage: ~$1,800 - Internet/phone (business portion): ~$900 - Professional subscriptions/memberships: ~$600 - Office supplies and miscellaneous: ~$200 The home office deduction was the biggest single item for me, but you have to be careful to follow the IRS rules - it needs to be used regularly and exclusively for business. The equipment category included laptop, monitor, desk, chair, and various software subscriptions I use for client work. Start tracking everything from day one, even small expenses - they really add up over the year!

This is such valuable advice about quarterly payments! I'm completely new to the contractor world and honestly had no idea about the underpayment penalties - that sounds like it could be a really expensive mistake to make. When you mention using Form 1040ES, do you find it pretty straightforward to calculate what you owe each quarter? I'm worried about either underpaying and getting penalized or overpaying and tying up too much cash throughout the year. Also, totally agree about the expense tracking from day one. I've been putting off some small freelance opportunities because the tax stuff seemed overwhelming, but reading through everyone's experiences here makes it feel much more manageable. The key seems to be just getting organized from the start rather than trying to piece everything together at tax time. Thanks for adding the quarterly payment reminder - that's definitely something I would have learned about the hard way otherwise!

This is incredibly helpful to see actual numbers! Your breakdown really shows that while contractors do face that initial sticker shock from the self-employment tax, the bigger picture can actually work out favorably with proper planning. I'm especially interested in your point about negotiating a higher rate to account for the tax difference. Did you factor in a specific percentage increase when you made the switch, or did you just aim for whatever felt right? I'm in early discussions for a contractor role and want to make sure I'm not undervaluing myself when we talk numbers. Also, which app do you use for tracking expenses? I keep seeing people mention different solutions and I'm trying to figure out what works best for someone just starting out. The immediate photo capture feature sounds like exactly what I need to avoid losing track of receipts. Thanks for sharing your real-world experience - seeing the actual dollar amounts makes this so much clearer than just talking about percentages!

@c00e85a536a6 When I negotiated my contractor rate, I calculated that I needed about 15-20% more to break even after accounting for the extra self-employment tax and loss of employer benefits. I ended up asking for 25% more to give myself a buffer, and they accepted it. For expense tracking, I use Expensify - it's free for basic use and the receipt scanning works really well. You just snap a photo and it automatically extracts the amount, date, and merchant info. I also tried QuickBooks Self-Employed but found Expensify simpler for my needs. The key in rate negotiations is to frame it in terms of the value you provide rather than just your tax burden. I emphasized my expertise and the fact that they wouldn't have to pay employer taxes, benefits, or provide equipment. Most companies understand that contractors cost more per hour but often provide better value overall.

This is really valuable insight from a professional perspective! The cash flow point is something I hadn't fully considered - even if the total tax burden ends up being similar, having to manage those quarterly payments and potentially a large April payment is a completely different financial planning challenge than just having taxes automatically deducted. I'm curious about your comment on S-Corp election for higher earners. At what income level does that typically start making sense? I'm looking at potentially earning around $80-90k as a contractor, so I'm wondering if that's something I should be thinking about from the start or if it's more relevant once you're making six figures. Also, your advice about starting conservative with deductions is really smart. I can see how it would be tempting to get aggressive trying to maximize every possible deduction, but you're right that it's better to be safe while learning the ropes. Is there a rule of thumb for what percentage of income in deductions starts to look unusual to the IRS, or is it more about having proper documentation regardless of the amount? Thanks for sharing your professional experience - it's really helpful to get the perspective of someone who sees how this plays out for lots of different contractors!

@00cca86b1ed2 Great question about S-Corp election timing! Generally, it starts making sense when you're saving more in self-employment taxes than the additional costs of payroll processing and compliance. The rough break-even point is usually around $60-80k in net business income, so your projected $80-90k range could definitely benefit from analysis. With S-Corp election, you'd pay yourself a "reasonable salary" subject to payroll taxes, while any remaining profit flows through as distributions that aren't subject to self-employment tax. On $80k income, if you took a $50k salary, you'd save SE taxes on the remaining $30k - that's about $4,600 in savings. Just make sure the salary is truly reasonable for your industry/role or the IRS may reclassify distributions as wages. As for deduction percentages, there's no hard rule, but I start paying closer attention when business expenses exceed 30-40% of gross income, especially for service-based contractors. The key is really documentation quality rather than percentage - I've seen contractors with 60% expense ratios sail through audits because they had perfect records, while others with 15% got questioned because their documentation was sloppy. The most important thing is that every deduction passes the "ordinary and necessary" test for your specific business. Keep detailed records and be able to explain how each expense relates to generating income.