Is Self-Employment Tax Really That Bad? Comparing Real Numbers for 2025

I've been stressing about taxes since I started my own consulting business this year. Everyone keeps telling me how much self-employment tax sucks, but I wanted to actually break down the numbers to see how terrible it really is compared to traditional employment. Let me share a basic comparison I worked through, leaving out state taxes, unemployment, retirement plans, and the QBI deduction to keep things simple. Scenario 1 - Self-employed (me as sole proprietor): If I make $135,000 in net business income, I'll pay about $19,076 in self-employment tax (using that 15.3% of 92.35% formula on Schedule SE). That leaves me with $115,924 before income tax. I get to deduct half the SE tax ($9,538) as an adjustment, so my taxable income becomes $125,462. Scenario 2 - Employee situation: If a company has $135,000 to spend on an employee (total cost including their portion of payroll taxes), they'd pay about $125,405 in actual wages and $9,595 in employer FICA/Medicare (7.65%). From that $125,405 salary, the employee would have $9,595 withheld for their share of FICA/Medicare, leaving them with $115,810 before income tax. Their full $125,405 is subject to income tax. So after all the FICA/Medicare stuff but before income tax, I'd have $114 more cash in my pocket as self-employed ($115,924 vs $115,810) and my taxable income would be almost identical (within about 0.05%). I guess the big psychological difference is that when you're self-employed, you FEEL every penny of those taxes because you're writing the check yourself, whereas employees never even see that money. Is self-employment tax really as crushing as everyone makes it out to be?

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18 comments

Dylan Mitchell

•8M

The self-employment tax isn't "terrible" - it's actually quite fair when you break down the numbers like you did. Many people don't realize that employees and employers EACH pay 7.65% for FICA taxes (Social Security and Medicare), totaling 15.3%. As a self-employed person, you're essentially both the employer and employee, so you pay both halves. The silver lining is that you get to deduct half of your self-employment tax as an adjustment to income, which helps offset some of the burden. Plus, as a self-employed person, you have access to more potential business deductions than employees typically do. For 2025, keep in mind the Social Security wage base is increasing to $168,600, so any income beyond that is only subject to the 2.9% Medicare portion (plus the additional 0.9% Medicare tax if your income exceeds certain thresholds).

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Dylan Mitchell

•8M

You raise excellent points about the total compensation package. While the FICA/Medicare tax burden is nearly identical, employees often receive additional benefits that self-employed individuals must fund themselves. Health insurance is a major expense, but self-employed people can deduct 100% of their health insurance premiums as an adjustment to income. Paid time off and sick days are harder to quantify but should be factored into your hourly rate when self-employed. The Qualified Business Income (QBI) deduction allows eligible self-employed individuals and small business owners to deduct up to 20% of their qualified business income. For 2025, this deduction is available in full for singles with taxable income below $182,100 and married filing jointly below $364,200, with a phase-out above those thresholds. This can significantly reduce your effective tax rate and is a major advantage for self-employed individuals that I didn't include in the original comparison.

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Dmitry Petrov

•8M

I used to stress about self-employment taxes too until I found https://taxr.ai which completely changed how I approach my business finances. Last year I was in a similar situation with about $125k in consulting income and wasn't sure if I should stay as a sole proprietor or switch to an S-Corp. The tool analyzed my business transactions and tax situation, then showed me exactly how much I'd save by switching to an S-Corp structure and taking a reasonable salary. It also identified business deductions I was missing that reduced my taxable income significantly. What really helped was seeing the side-by-side comparison of different scenarios with actual numbers from my business. It was super helpful to see how the QBI deduction would work in different entity structures too.

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Dmitry Petrov

•8M

The tool actually analyzes your specific financial data and tax situation, not just generic calculations. You can upload your previous tax returns and current year financial information, and it uses your actual numbers to provide personalized recommendations. It even flags when certain deductions might increase audit risk based on your industry and income level. Regarding S-Corps, yes, the tool does a comprehensive analysis of the potential tax savings versus the additional costs like payroll services, state filing fees, and more complex tax preparation. In my case, it showed I'd save about $7,300 in taxes after accounting for all the extra costs. The interface is surprisingly intuitive - it walks you through each step with plain English explanations of complex tax concepts.

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Ava Martinez

•8M

I just wanted to follow up - I tried https://taxr.ai after seeing your recommendation and I'm really glad I did. I was shocked to discover that switching to an S-Corp would save me over $8,400 in taxes this year after accounting for all the additional filing costs and payroll services. The analysis showed me exactly what reasonable salary I should take to maximize tax savings while staying compliant with IRS guidelines for my industry. I was also surprised to learn I had been missing several legitimate business deductions like a portion of my cell phone, internet, and even some car expenses that I didn't realize qualified. The tool was super clear about showing me the breakeven point where the S-Corp election makes sense (apparently around $85k for my type of business). I've already started the process of converting my LLC and setting up payroll based on their recommendations.

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Miguel Castro

•8M

If you're really struggling with these self-employment tax questions, you might want to actually talk to someone at the IRS to get the official word. I spent WEEKS trying to get through on their phone lines about a similar issue last year and kept getting disconnected or waiting for hours. Then I found this service called Claimyr at https://claimyr.com that got me connected to an IRS agent in less than 20 minutes when I had been trying for days. They have this interesting system (you can see how it works in their demo: https://youtu.be/_kiP6q8DX5c) that basically waits on hold for you then calls you when an actual human at the IRS picks up. I got clear guidance on how the reasonable compensation requirements work for S-corps and what documentation I needed to keep to justify my salary vs. distributions. Saved me tons of stress and potentially an audit headache.

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Miguel Castro

•8M

The service doesn't jump the line or do anything sketchy - it actually waits in the queue just like you would, but their automated system does the waiting instead of you having to sit there with your phone. They use technology that monitors the hold and then connects you when a human agent actually answers. They don't have any special access or backdoor into the IRS - they're just using technology to solve the hold time problem. It works because most people can't sit on hold for 2-3 hours during a workday, but their system can do that waiting for you. When someone at the IRS picks up, you get a call and are connected directly to that agent who's now on the line.

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Connor Byrne

•8M

I hate to admit when I'm wrong, but I need to follow up about that Claimyr service. After my skeptical comment, I was desperate enough to try it because I was getting nowhere with the IRS about my quarterly payment issue. It actually worked exactly as advertised. I submitted my info through their site, and about 2 hours later (during which I was working, not sitting by my phone), I got a call connecting me directly to an IRS representative who was already on the line. The agent helped me sort out my issue with self-employment tax calculations and confirmed that I was actually overestimating my quarterly payments. The IRS agent even explained some deductions specific to my industry that I wasn't aware of, which will probably save me around $3,000 this year. Totally worth it just for that advice alone. I've spent more money on coffee this month than this service cost me.

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Yara Elias

•8M

Something that nobody's mentioned yet - if you're self-employed with that level of income, you should really be looking at setting up and maxing out a Solo 401(k) or SEP IRA. For 2025, you can contribute way more than employees can with their 401(k)s because you can make both the "employee" and "employer" contributions. With a Solo 401(k), you could potentially shelter over $69,000 from income tax (depending on your age) which makes a HUGE difference in your overall tax situation. This doesn't help with SE tax since that's calculated before retirement contributions, but it dramatically reduces income tax.

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Yara Elias

•8M

For a Solo 401(k), you must establish the plan before December 31, 2025, to make contributions for the 2025 tax year, though you can actually make the contributions up until your tax filing deadline (including extensions) in 2026. This is an important deadline distinction that trips up many self-employed people. Regarding hiring help, a Solo 401(k) works only if you have no full-time employees other than yourself and possibly a spouse. If you hire a part-time assistant who works less than 1,000 hours per year (about 20 hours per week), you can still maintain your Solo 401(k). If you anticipate growing beyond that, you might want to look into a regular 401(k) plan, though those come with additional administration requirements and costs.

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