Topic 02 · 6 min read
Wages, Gig Work, and Self-Employment
The same $1,000 is taxed differently depending on how you earned it.
An employee has taxes withheld from every paycheck and splits Social Security and Medicare with the employer. Someone paid as a contractor receives the full amount, owes both halves of those payroll taxes, and has to set money aside on their own — but can deduct the costs of doing the work.
What to know
- Employee withholding
- A W-4 tells the employer how much income tax to hold back. Too little means a bill in April; too much means a large refund and a year of lending money for free.
- Self-employment tax
- Contractors pay roughly 15.3% of net profit for Social Security and Medicare, on top of income tax. Half of it is then deductible.
- Business expenses
- Ordinary and necessary costs — supplies, mileage, a portion of a phone bill — reduce the profit that gets taxed. Personal spending never does.
- Net profit, not revenue
- Tax applies to what is left after expenses, which is why accurate records are worth real money.
- Quarterly estimates
- Without an employer withholding, the government expects payments four times a year.
The tax benefit
Self-employment brings a heavier payroll tax bill but unlocks deductions, retirement plans, and the qualified business income deduction that employees cannot use.
Worked example
Two versions of $30,000
As an employee, $30,000 arrives with about $2,295 of payroll tax already withheld and matched by the employer. As a contractor earning $30,000 with $6,000 of expenses, tax applies to $24,000 of profit, and self-employment tax on that profit is roughly $3,400.
Watch out for
- Being called a contractor does not make it legally true; the facts of the working relationship decide.
- Mixing personal and business spending in one account makes deductions hard to defend.
- Skipping quarterly payments adds penalties even when the final return is correct.
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