The Self-Employed Are Paying a 15.3% Flat Tax on All Self-Employment Income

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Photo © Julie Dermansky

Cut the Self-Employment Tax in Half for the First $50,000 in Income

Reduce the Self-Employment Tax to equal only the employee share of the Social Security and Medicare contributions, 7.65%, for the first $50,000 of income. This huge savings would target the self-employed most in need in rural and local urban economies.

The self-employed are the highest taxed, most regulatory burdened, least protected Americans. Between 1951 and 1990, the Self-Employment Tax rate increased nearly 700%.

When the Truman Administration extended compulsory coverage of Social Security to the self-employed in 1951, the self-employed paid the employee share of the Social Security Tax, and one half the employer share; at a combined rate equal to a flat tax of 2.25% on all earned income below $3,600. (In 1951 the maximum Self-Employment Tax was $81.)

Not until the Reagan Administration came to power, had anyone dreamed that the Self-Employment Tax would rise to 15.3%. The 1983 Social Security Reform Act structurally changed the Self-Employment Tax so that the self-employed paid both the employee and employer’s share of Payroll Taxes; by 1990 the rate had nearly doubled from the 1980 rate of 8.1% to today’s rate of 15.3%. Now, the self-employed pay both the employee and employer shares of the Social Security Tax, at a combined rate of 12.40%. Together with their contribution to Medicare, the self-employed paid in 2019 a flat tax of 15.3% on all earned income below $132,900; there are no personal exemptions or standard deductions. This is called the Self-Employment Tax. Consequently, a self-employed family of four making $45,000 has as their first expense a Self-Employment Tax of about $6,500. While there is “logic’ in a formula in which the self-employed pay both the employee and employer share of payroll taxes, there is no justice in taxing people into poverty through a regressive flat tax that falls most heavily on low-income people.

The Self-Employment Tax should equal only the employee share of the Social Security and Medicare contributions, 7.65%, for the first $50,000. The 15.3% Self-Employment Tax should only kick in after $50,000. With this savings the self-employed would have a better chance to invest in themselves and their businesses, as well as pay for health insurance. They would also be better able to compensate themselves for protections taken for granted in corporations and government, but lacking in their own producer group, i.e., minimum wage, workers compensation, and unemployment insurance. This cut in the Self-Employment Tax would initially cost the Social Security Trust Fund (currently over 2.5 trillion dollars) about thirty billion dollars a year, but would also be a powerful economic stimulus, particularly in rural areas. The self-employed would not have their retirement funds decreased, if this Self-Employment Tax reduction incorporated the same formula used in the Earned Income Tax Credit.

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Photo © Julie Dermansky

Health Insurance

Reduce health insurance costs by enabling the self-employed to deduct their health insurance premiums as a business expense.

Allowing a self-employed business to deduct a health insurance premium of $10,000 as a business expense would save that self-employed business about $1,500 on its Self-Employment Tax; the 15.3% flat tax on all their income. This populist reform means the self-employed will receive the same deduction for health insurance as large corporations.

The bipartisan Tax Fairness for the Self-Employed Act (HR 3880) would make this deduction law by amending the Internal Revenue Code of 1986; it is still looking for a Senate sponsor.

Example of proposed reductions:

ISSUES | WHO ARE THE SELF-EMPLOYED | TAX | HEALTHCARE | REGS | DATA | YOUR BIRDDOGGER