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Comment by PragmaticPulp | Hacker News Reader

> What ? I've never heard of a scenario where you get less money after tax as a contractor vs employee

It’s called self-employment tax: https://smartasset.com/taxes/self-employment-tax

It’s not actually a separate tax. Normally your employer pays these taxes but you don’t see it. When you are a contractor you are self-employed, so as an employer of yourself you have to pay these taxes like any other employer.

Some people play games with certain corporate structures where they pretend they’re only worth a fraction of what they’re getting paid and then they extract the rest as dividends. It’s one of those tax tricks that works as long as nobody ever looks to closely at your tax returns, but if you’re caught you have to pay it back plus penalties.

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I think the point is if you're a contractor and you're not getting the same rates as an equivalent company would for that contract/position you're under-selling yourself. As for the "tax trick" you still don't get out of paying income taxes on the entire revenue you generate. You just pay employment taxes on the portion that is salary. Whether that's "fair" or not is open to debate of course.

When contracting, in addition to self-employment tax, you have to consider risk of not having paid work for a time and other lost benefits like health care. The rule of thumb I've heard is $1 as an employee ~ $1.50 as a contractor.

The trick discussed by the parent pertains to S-corporations, which allow you to take distributions as long as you pay yourself a reasonable salary

It depends on the country. I'm not familiar with contractors in the USA but in many countries contractors take home (with a few corporate tricks) is significantly higher than employees, especially, as you mentioned, if you can pay yourself with dividends, avoiding most of social insurance.

It's perfectly legal though, not a matter of oversight.

Countries like the UK are now closing these and other loops with IR35 but you can still do that in many places.

You also have the option of not taking money out of the company and use your company to invest your own money, paying up taxes only on the money you need to support your lifestyle.

When you're done living where you're living you can also opt for a stop in Dubai or Portugal with NHR, to withdraw the profits as foreign dividends tax free.

Not in my country, I actually get tax break for being self employed. In the end I pay less tax on my income than someone employed earning a similar income. Not to mention I make 2-3 times what I would make being employed. And I'm not playing any tax tricks.

>It’s one of those tax tricks that works as long as nobody ever looks to closely at your tax returns, but if you’re caught you have to pay it back plus penalties.

How is that a tax trick ? Pretty much anyone owning a company pays himself a tax minimum and extracts the rest through profits, etc.

You're required to pay a "reasonable salary". So if you pay yourself minimum wage, but collect $100+k in profit, you may get funny looks from the IRS.

Rule of thumb I've heard is 50% wages 50% profit, up until $100k wages, beyond which you can really start milking the profit.

Yeah here we have a minimum director salary (which is basically median wage instead of minimum), after that everything is pulled out through profit.

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