Self-Employment Tax
Self-employment tax is the Social Security and Medicare tax paid by people who work for themselves. The rate is 15.3% (12.4% for Social Security on the first $176,100 of earnings in 2025, plus 2.9% for Medicare on all earnings). Employees pay only half this rate (7.65%) because their employer pays the other half. Self-employed individuals can deduct the employer-equivalent portion (7.65%) from their adjusted gross income.
Example
A contractor with $100,000 in net earnings pays $15,300 in self-employment tax ($12,400 Social Security + $2,900 Medicare). An employee earning the same amount pays only $7,650 — the employer covers the rest.
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Business Valuation for Digital Businesses
A small digital business is typically worth its Seller's Discretionary Earnings (SDE) multiplied by an industry-specific multiple. In 2026, multiples range from 1.5x for consulting firms to 6.0x for SaaS businesses, depending on business type, growth, recurring revenue, and owner dependency.
Contractor vs Employee Compensation
Contractors typically need to charge 40-70% more per hour than the equivalent employee hourly rate to achieve comparable take-home pay, because they cover self-employment tax (15.3%), health insurance, retirement, PTO, and business expenses themselves.
Employee Salary Equivalent
An employee salary that matches your contractor income is typically 25-40% lower than your contractor gross, because the employer covers half of FICA taxes, provides benefits, and gives paid time off that you currently fund yourself.