How Bad Is Self-Employment Tax Compared to W-2 Employment?

You've got it right! The math shows that self-employment tax isn't actually "terrible" compared to being a W-2 employee - it's essentially equivalent when comparing apples to apples. The 15.3% self-employment tax roughly equals the combined 7.65% employer portion plus 7.65% employee portion of FICA taxes. The psychological difference is huge though. When you're self-employed, you feel the full pain of writing that check to the IRS, while employees never see the employer portion and the employee portion is withheld automatically. Plus, you have to make quarterly estimated payments instead of having taxes taken out each paycheck. The other big differences come from things you didn't include in your calculation: business deductions, the 20% Qualified Business Income Deduction (which can be substantial), retirement plan options, and health insurance deductions. Depending on your situation, these can actually make self-employment more tax advantageous.

After struggling with this exact question last year, I found this amazing tool at https://taxr.ai that completely changed how I approach my self-employment taxes. I uploaded my previous tax returns and business financials, and it showed me exactly how different entity structures would affect my tax situation. The comparison between staying as a sole proprietor vs. making an S-Corp election was eye-opening for my specific situation. What I really liked was how it explained the break-even point where the S-Corp election makes sense based on my income level, considering all the added costs of maintaining an S-Corp. It even factored in the QBI deduction differences!

Just wanted to share my experience after trying taxr.ai based on the recommendation here. I was really surprised by how detailed the analysis was! I've been operating as a sole proprietor making about $140k, and it showed me I could save almost $7,200 annually by switching to an S-Corp. What really helped was the breakdown of "reasonable salary" for my specific consulting business in my city. The tool suggested a salary range of $85-95k based on industry data, which means I could take about $45-55k as distributions that wouldn't be subject to self-employment tax. It also factored in the extra costs like paying for payroll service and filing an 1120S. Definitely changed my perspective on the "terrible" self-employment tax. With the right structure, it's manageable!

If you're struggling with any tax questions or need to talk to someone at the IRS about self-employment tax issues, I highly recommend using https://claimyr.com. I spent WEEKS trying to get through to the IRS on my own with no luck (either busy signals or disconnected after hours on hold). Used Claimyr and they got me connected to an IRS agent in about 20 minutes instead of the hours I was wasting. You can actually see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent was able to clarify some confusing notices I received about underpayment penalties on my self-employment taxes and helped me set up a payment plan. Saved me so much stress during tax season.

I need to publicly eat crow here. After my skeptical comment, I decided to try Claimyr because I was getting absolutely nowhere trying to resolve an issue with my estimated tax payments. I'd been calling the IRS for THREE WEEKS with no success - either busy signals or disconnected after waiting on hold. Used the service, and no joke, I was talking to an actual IRS agent within 22 minutes. They helped me sort out my quarterly estimated payments for my self-employment income and confirmed I was calculating them correctly. The agent even helped me understand why my previous year's calculation was flagged - turns out I had been double-counting some business expenses on both Schedule C and Schedule A. Would've never figured that out without actually speaking to someone. I'm still shocked it actually worked. Saved me from potential penalties.

One thing nobody's mentioned yet is that self-employment taxes can actually be BETTER than W-2 employment in some ways. As a self-employed person, you can deduct: 1. Home office (if you have a dedicated space) 2. Health insurance premiums directly on 1040 3. Business travel, meals (50%), cell phone, internet 4. Vehicle expenses or mileage 5. Professional development, subscriptions, books 6. Much higher retirement contribution limits with SEP IRA or Solo 401k When I switched from W-2 to self-employed, my actual tax rate went DOWN even with self-employment tax because of all these deductions!

Has anyone actually calculated how much you'd save with an S-Corp at different income levels? Is there a break-even point where it makes sense?

Your calculation is spot on! The numbers really do show that self-employment tax isn't the monster it's made out to be. I went through the same panic when I first started freelancing, but once I did the math like you did, I realized the total tax burden is nearly identical. The real kicker for me was discovering the QBI deduction - that 20% qualified business income deduction can be huge for self-employed folks. On your $100k example, that could potentially save you another $4,000+ in income taxes (depending on your tax bracket and other factors). Also, don't forget about quarterly estimated payments! Since you're not having taxes withheld automatically, make sure you're setting aside about 25-30% of your income for taxes throughout the year. I learned this the hard way my first year when I got hit with underpayment penalties. The psychological aspect is definitely the hardest part - writing those big checks to the IRS quarterly feels brutal compared to never seeing the money in the first place as a W-2 employee.