Sole proprietors and independent contractors love to grumble about the IRS self-employment tax, which requires them to pay twice as much as their traditionally employed counterparts. At one time, however, the self-employment tax burden was minimal. The fascinating origins of the self-employment tax make it quite clear that today’s taxpayers suffer a significantly greater financial burden than sole proprietors from the 1950s and 1960s.
Self-Employment Contributions Act
The 1954 Self-Employment Contributions Act mandated that sole proprietors and small business owners cover Social Security expenses by paying a tax on their net income. At just 2.25 percent, the tax rate for self-employed professionals was initially quite a bit lower than it is today. Those subject to the tax only had to pay taxes on up to $3,600 of income, which means, even in the worst-case scenario, a given taxpayer was on the hook for $81.
Hikes in Self-Employed Tax Rates
Over the years, self-employed individuals have been subject to huge increases in tax rates, although these hikes arrived gradually. By 1974, the self-employment tax rate had reached 7.9 percent. Additional tax hikes occurred throughout the 1980s, and by 1990, the rate had increased to a whopping 15.3 percent. Thankfully, no further rate hikes have occurred since then, other than an additional 0.9 Medicare increase for those earning over $200,000. In 2015, the Social Security portion of the self-employment tax was applied to all income up to $118,500. Today, there is no income cap on Medicare taxation, which was not part of the original Self-Employment Contributions Act.
Call Our Office
The history of the self-employment tax is fascinating, but actually filing your tax return? Not so much. Call us at 720-398-6088 to learn how we can make tax season less of a hassle.