Today is tax day, when I swing conservative more than any other day of the year. You may have noticed my conversion to libertarian politics last night: as the moon turned red and eventually disappeared, I began to agree with Ron Paul. I paid my taxes yesterday at an effective rate of 24%. By contrast, Mitt Romney famously paid 14% in 2011. I did not make Romney money last year, but I paid nearly double Romney’s rate, thanks to the self-employment tax. I am here to tell you that the self-employment tax is bullshit.
As a freelance writer, I pay a 15% tax on all my income for not having an employer. That rate covers what I would contribute to Social Security and Medicare if I had a regular job: 7.65% for my share and 7.65% for what would be my employer’s share. With a little searching, you should be able to find a pretty good tax estimator online that can simply this process.
Already our reason is affronted, since my employer does not exist. You could argue that I am my own boss and should therefore pay double, except the way in which I am least my own boss is that I do not pay myself. To ask me to pay a theoretical employer share of FICA taxes is like asking me to pay theoretical property taxes on the house I don’t own.
The condition of being self-employed, of not getting a W-2, is not the condition of employing one person who is me. It’s the condition of having no employer. To make me pay the employer share of taxes on contract wages reported on my 1099 forms is to ignore the fact that there is another, employer-like entity who pays me: my clients. These people literally employ me. But the self-employment tax shifts the burden of payroll taxes away from such people and onto workers, even though the money they pay us is tracked and documented just as well as regular wages.
Pretty much by definition, my clients have more money than me.* 
The self-employment tax is therefore regressive; it falls more heavily on the poor and working than on the rich and hiring. It’s also blatantly rigged in favor of the kind of self-employed people who make enormous amounts of money, such as actors and their dentists.
Self-employment income is taxed at 15.3% up to $106,800. Any income in excess of that amount is not subject to the self-employment tax at all, so if I make a hundred grand writing next year, I will pay exactly as much in self-employment taxes as Cameron Diaz. Obviously, this is a hypothetical situation. Cameron Diaz won’t make any money next year, because she turned 40, but if I had somehow made $100,000 the year The Mask came out, her millions of actor dollars would not be subject to the same taxes as my tens of thousands of writer dollars.
This brings us to a larger question about the self-employment tax: what kind of work behavior do we want to incentivize? For the purposes of this discussion, I would like to point out that the contemporary model of middle-class work—individuals work for corporations and get a biweekly or monthly salary, which is roughly the same no matter how their work output varies from pay period to pay period—is relatively new.
Laboring for one employer in exchange for regular wages became the dominant mode of human work after the industrial revolution. Before that, most Americans worked for themselves as artisans and yeoman farmers. We’re clearly glossing over some history, here, as plenty of Americans were poor laborers, domestics, women, slaves, et cetera. But the ideal of American work remains the self-sufficient homesteader or craftsperson, laboring to bring his own products and skills to market by his own effort and ingenuity.
I think that if you asked most politicians what American work should look like, that’s what they’d describe. The reality since World War II, however, is that most middle-class professionals work in offices for other people, and the tax code reflects that.
Now those jobs are less secure, and many of them are being replaced by 1099 consultants like me. American work is changing, and artisans and other skilled laborers are poised to live better working lives than we did 50 years ago. As a nation, we should look at our tax code and consider what kind of work we want to encourage.
We claim to support risk-taking and creativity, the entrepreneur who strikes out on his own to do better and more satisfying work than his competitors. The self-employment tax discourages that. It punishes us for not working for someone else, as if income instability and expensive health insurance were not punishment enough. The American dream says to seek independence, to take risks, to be your own boss. The US tax code says differently, and it should change.
What you’re missing is that not having to pay the employer’s half of the tax is a subsidy of your product. In the marketplace for writers, when the choice is some random company that has 20 writers employed and whose cost for each project includes the salary of the employee plus 7.65% from the company plus another 7.65% that they need to increase the salary of the employee to compensate for the tax, or Combat! Inc. which only has the costs of salary +7.65%, you get an artificial advantage. (Yes, I’m ignoring other overhead costs. Those advantages and disadvantages don’t tie into this conversation). In theory, you should be building that cost into your rates. Rather than it being comparable to paying taxes on a house you don’t own, it’s more like acknowledging that your rent is going to be related to housing taxes, because the owner has to raise rent if taxes go up.
Employers don’t really absorb their portion of payroll taxes, they pass them on to their employees, so salaried workers pay “double” just like the self-employed. They just pay it in a smaller pay check for the same work. Cutting the self-employment tax would probably help shift work toward even more of a contractual basis which is a serious problem for worker’s bargaining power. I agree about the regressiveness of the cap, though.
The consumer always pays the full tax burden, no matter which way you slice it. Every penny is passed through in both the case of the self employed and the case of employer/employee arrangements. Then the question should be how much taxation is reasonable? For wealthy working people, the total burden is between 43 and 53 percent, depending on the state of residence. Have we reached the point of insanity yet? By the way, mitt Romney’s money has already been taxed and then put to work building businesses. Thats why its taxed again at a lower rate. How many times should the same money be taxed? That’s the question libertarian minded people ask, especially since we want people to build businesses with as little hinderance as possible.
Since we’re all consumers buying from the same market, I think the important question regarding this post is whether doing away with the self-employment tax is fair regarding the income and benefits of people which are varied. So a couple questions to those advocating this: How do we make up for the shortfall in your Social Security and Medicare payments? Are you foregoing half of these benefits? Or are we raising taxes on wage/salaried workers to make up for it — the full amount of which will be paid for by the workers, whatever the nominal distinction between employer and employee payments? Does it seem fair that wage/salary workers would pay 22.65% for SS/Medicare while you pay 7.65%? Or will this be made up in some general taxation way, and wage/salaried workers will just pay double, not triple, what the self employed pay for the same SS/Medicare benefits?
Not that there are equal numbers of wage/salaried workers and self-employed, but you get my point.
This idea that money shouldn’t be taxed repeatedly is a bunch of hogwash, and is a somewhat nonsensical statement.
Money is an abstraction representing a lot of things, one of those things is ‘the time spent by an individual being productive’. If Mitt romney invests money into a business and makes $100,000 it’s the same damn thing as an employee of that business doing $100,000 in work and getting paid for it. The only question is which sort of ‘productivity’ you want to encourage by taxation of one type more than the other. And remember that by encouraging one, you necessarily discourage the other.
Furthermore, how the hell can one track this or that dollar through the economy and how many times it has been taxed. It may very well be another completely nonsensical statement.
Well I’m in the Schedule-C world as a traveling actor, but I imagine many of the same business deductions apply. You get to deduct the cost of your writing space at home, the amortized cost of your laptop, etc. Whatever Combat! Costs to produce. Nearly every book and song you buy for research and review, which I’m guessing is no small amount. A good chunk of your telecom costs, too.
Aviv, our tax code explicitly rewards investment over work and we have the economy to show for it: a massive investment economy together with high unemployment. Problem is that investment economy has been gradually de-coupling from the production economy so less and less trickles down. The average worker or entrepreneur starting out cannot take much advantage of that incentive to invest.
So we turn to collective investments for health, retirement and education, funded by a progressive income tax. The only “insanity” is that all the deductions and loopholes make the code essentially flat. What little curve does exist in the income tax code is much sharper at the lower brackets than the higher.
I am against the forced participation in the Social Security Scam altogether. I am outraged that I HAVE TO participate, at the risk of losing my home, if I don’t. Why can’t I opt-out of SSS? Is this the land of the free, or the land of the slave (with a ‘good’ master of course).
Anyone interested in a coordinated effort STOP PAYING the self employment tax at the same time, let me know. Seriously.