Have you ever dreamt of quitting your job and being your own boss? Don’t be so quick to turn in your resignation — there’s a little pitfall that few people talk about: Self-employment tax.
That’s right, the government taxes you for being self employed. Sort of.
When you work for someone else, you split your social security and medicare taxes with them 50/50. You pay 7.65% and they pay 7.65%. When you work for yourself, the entire burden falls on you.
Sure, you can deduct the bonus 7.65% from your income to reduce your personal income tax, but that’s not very comforting at tax time when the amount owed to the feds keeps ticking up.
We hear a lot of chatter in this country about job creation. How important small businesses are. Every small business starts with a single person and as a business of 1, I feel pretty darn discouraged at tax time when I see how much of my money is going to the government. You want to make jobs? How about if small businesses pay no tax until they make over $200,000/year regardless of where they conduct business? Many small businesses start at home and a lot of people — like me — don’t qualify for the home office deduction since we need to share spaces for other things.
The current tax-free business threshold is a mere $400/year. That’s not even going to cover half of the average 1-bedroom apartment rent in my area. Times have changed and inflation has happened, it’s time the government updates tax codes to encourage people rather than penalize them.