Expert: Shirley McAllister, CPP, PHR - 2/24/2010

Question
I am a self-employed resident of Massachusetts (single, no dependents).  I would like to compare income as an employee vs income as self-employed.  I don't have a clue how to do this.  If I can make $85k as an employee, how much do I need to make when self-employed to earn the same NET income?  Is there an equation I can use to figure this out?  Thanks for your time.

Answer
If self employment adjusted earnings are 85,000.00
Self employment deduction               -6,502.00
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Taxable self employment earnings         78,498.00
Fica tax at (12.4%)                      -9,734.00
Medicare at (2.9%)                       -2.276.00
Federal at (15%)                        -11,775.00
State at (8.2%)                          -6,437.00
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Net Income                               48.276.00

Of course there may be other deductions and you may have to pay more or less state income tax to your state rate. Your rate for federal could be more or less than 15.3% depending on your deductions.
Go to IRS.GOV and search for publication 505 and other publications which will help with self employment. You should be making quarterly estimated self employment tax payments to the IRS.

Now if you are an employee with adjusted wages of 85,000.00
Deduction for annual single and 1                 -3,650.00
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Taxable Wages                                     81,350.00
Federal Tax (using tax tables s-1)               -15,879.00
Fica Tax (6.2%)                                   -5,044.00
Medicare Tax (1.45%)                              -1,180.00
State Tax (8.2%)                                  -6,671.00
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Net Wages                                         52,576.00  

Your taxes for federal or state may be more or less depending on what you have on your W-4 form for deductions. The Fica and medicare is less because your employer pays the employer share where you pay both shares if you are self employed as you are your employer.

This is just a rough draft, you would need to talk to a tax preparation person or get guidance from IRS.GOV to figure specifics for your situation. Often in Self employment you have over deductions for your business which would include the costs of doing business.

Shirley