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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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.