How Bad Is Self-Employment Tax Really? Breaking Down the Numbers for 2025

Thanks for confirming my math! You're right about the psychological impact - I've been making quarterly payments on my side business income and it definitely hurts more than regular withholding. What about health insurance? As self-employed, I'd lose my employer contribution, but I've heard there's some tax advantage for self-employed health insurance premiums?

You've hit on an important point! Self-employed individuals can deduct 100% of health insurance premiums (including dental and long-term care) for themselves, spouse, and dependents as an adjustment to income on Form 1040. This is a valuable deduction that W-2 employees don't get unless they itemize and meet the 7.5% AGI threshold for medical expenses. The caveat is that you'll still be paying the full premium without employer subsidization, which is often substantial. Many employers pay 50-80% of premium costs. Run the numbers with your specific situation - calculate your current contribution versus the full premium cost, then factor in the tax deduction value. For most people, employer-subsidized insurance is still financially advantageous, but the gap isn't as wide as it initially appears when you account for the deduction.

Does it handle state taxes too? I'm in California and the additional state stuff makes my head spin when I think about going self-employed.

Sounds useful but how accurate is it compared to working with an actual CPA? I've been burned by tax software before that missed some key details about my situation.

Yes, it handles state taxes for all 50 states including California. It actually breaks down each state's specific requirements and even shows you the various filing deadlines and estimated payment dates. For California specifically, it accounts for the additional 1% mental health tax on income over $1 million if you somehow hit that threshold! Regarding accuracy versus a CPA, I actually had my CPA review the results and he was impressed. The tool doesn't replace professional advice, but it helps you understand your situation better before you talk to a professional. It's more comprehensive than standard tax software because it's specifically designed for self-employment and business structure decisions rather than just annual filing. It caught several deductions my previous tax software missed.

Wait, how does this actually work? Does it just keep calling for you or something? Seems too good to be true considering how impossible it is to reach the IRS.

Sorry but this sounds sketchy. Why would I pay for something I can do myself for free? The IRS is a pain but eventually you get through if you call at the right time. Sounds like a scam taking advantage of frustrated people.

It basically uses an automated system to navigate the IRS phone tree and wait on hold for you. When it reaches a human agent, it calls your phone and connects you directly. You don't have to sit there listening to the hold music for hours. It monitors multiple lines to find the fastest possible connection. I completely understand the skepticism - I felt the same way at first. But consider the value of your time. I had previously spent 4+ hours on three separate occasions trying to get through without success. For me, finally resolving my issue was absolutely worth it. Nothing sketchy about it - you're still talking directly to an official IRS agent, the service just handles the frustrating wait time part. But everyone has to make their own decision about what their time is worth!

This is such an underrated point! My dad tried to be "clever" by minimizing his reported income for decades. Now his Social Security benefit is tiny compared to what it could have been. Those extra dollars saved on SE tax ended up costing him thousands in annual benefits. Do you know if there's a way to calculate the optimal balance between paying enough for good SS benefits without overpaying unnecessarily?

Yes, that's a great question. The Social Security Administration has a tool called the "my Social Security" account where you can see your earnings record and projected benefits. It can help you understand how your current contributions affect your future benefits. For most people, you want to make sure you're at least hitting the Social Security wage base annually during your prime earning years. For 2025, that's $168,600. Earning at least that amount (whether through W-2 wages or self-employment income) will give you the maximum Social Security credits for that year. If you're using an S-Corp strategy, ensuring your reasonable salary is substantial enough to support good future benefits is important, even if it means paying a bit more in FICA taxes now.

The basic rate stays at 15.3% (12.4% Social Security + 2.9% Medicare), but the wage base for the Social Security portion increased to $168,600 for 2025. There's also still the additional 0.9% Medicare tax on income above $200,000 ($250,000 if married filing jointly).

Thanks for the info! That increase in the Social Security wage base is pretty significant - guess I'll be setting aside a bit more this year. Appreciate the quick response.

Great questions! You're right that retirement savings can significantly impact the overall financial picture. As a self-employed person, you actually have some pretty powerful retirement options that can sometimes be even better than traditional 401(k)s. With a Solo 401(k), you can contribute as both the employee AND employer. For 2025, that means up to $23,500 as an employee contribution, plus up to 25% of your net self-employment income as an employer contribution, with a total limit of $70,000 (or $77,500 if you're 50+). SEP-IRAs are simpler to set up but only allow employer contributions of up to 25% of net SE income. The loss of employer 401(k) matching is real, but if your business is profitable enough, the higher contribution limits for self-employed retirement plans can more than make up for it. Plus, these contributions reduce your taxable income, which indirectly reduces your self-employment tax burden. Regarding quarterly payments - yes, you need to be careful! The general rule is you need to pay either 90% of the current year's tax liability or 100% of last year's liability (110% if your prior year AGI was over $150k) to avoid penalties. I set up automatic transfers to a separate tax savings account to make sure I'm always prepared.