If you are an employee of a company in the USA, your paycheck will deduct 6.2% for social security tax (up to a wage base - if you make a lot of money, you will eventually reach a point in the year when you stop paying social security tax) and 1.45% medicare tax. Your employer also pays 6.2% and 1.45% on your wages.
If you are self employed, you pay both the employer and employee side of these taxes. If you are self employed, you pay a total of 12.4% social security and 2.9% medicare. That means self employed individuals pay 6.2% + 1.45% = 7.65% more tax when compared to someone making the same salary as an employee.
1.
A person has a job offer as an employee at a company that pays
\(\$50,000\). Another person has a job
offer for \(\$52,000\), but they would
be an independent contractor (self employed). When considering only
social security and medicare tax, which job is the better option?
As the self employed option involves 7.65% more tax, we should reduce the self employed tax by 7.65% to compare it to the employee option.
\[\$52,000 - 0.0765 \cdot \$52,000 =\]
\[\$52,000 - \$3,978 =\]
\[\$48,022\]
When considering only these two taxes, the self employed option has a smaller take home pay.
1. A person has a job offer as an employee at a company that pays \(\$42,000\). Another person has a job offer for \(\$48,000\), but they would be an independent contractor (self employed). When considering only social security and medicare tax, which job is the better option?
1. If a self-employed job offer has a higher salary than another employee job offer, it might not mean the job has a higher take home pay. Social security and medicare taxes are higher for self employed individuals. What other tax considerations should be made before taking a self-employed job that has a higher salary?