Self-Employment Tax

If you’re self-employed, it’s like you run your own company. Since you don’t have a company to take out those slices for Social Security and Medicare, you have to pay the whole thing yourself. That’s why the self-employment tax is higher, at 15.3% for 2024. It covers both the slices that would normally be taken out of your paycheck, plus the slice your employer would have paid.

In most cases, you’ll pay tax on 92.35% of your self-employment income.

You still have to pay income taxes on top of that, just like everyone else. However, you also get to deduct many business expenses from your income which can lower your overall tax bill.

Salary Tax (Employee)

When you work for a company, it’s like they take out two slices of tax pie from your paycheck before you even see it. One slice is for Social Security and Medicare taxes, and the other is for income taxes.

The company pays another slice for Social Security and Medicare on your behalf. So, in total, there are two slices for Social Security and Medicare, and one slice for income taxes, but you only see two slices come out of your paycheck.