A minor correction: it's not as bad as 15.3%. The self-employment tax is really just the company share of FICA withholding (6.2%) plus Medicare withholding (1.45%) If you're an employee you pay 6.2%+1.45%=7.65% and your employer pays the same. If someone else (employer) is not paying the 7.65% then you do.

However, for 2011 the FICA rate for employees is 4.2% instead of 6.2%, so the self-employment tax remains effectively 7.65%. But that's only for the first $106,800 in earnings - everything above that is not subject to FICA and Medicare for employer and employee.

Another (even more) minor correction: there's no limit on the Medicare tax, currently 1.45%.

As "bad" as 15%? Tax is at least 38% here in Au for that wage (was 60% not so long ago).

Well, it's 15% for FICA (employee + employer), but there's also normal income tax, which starts at 10% and gets up to 35%. And then the state and, depending on where you live, the city have income and/or payroll tax as well (usually in the single digits).

That's "only" for social security and medicare. You still pay federal income tax on top of that.

And on top of that the state income taxes in most states, and sales taxes that usually approach 8 or 9%, and property taxes on real estate (and autos where I live). Also if you manage to save anything after all that, you can look forward to paying dividend or capital gains taxes (a form of double taxation).

It is a myth that America is a low tax nation.

Most other countries have twice that sales tax, as well as having all those other taxes. The best rough estimate of taxation burden might be proportion of government spending of GDP, which IIRC is about 35% for US, and is lower than eg most European countries.

Government spending as a percentage of GDP per country

http://en.wikipedia.org/wiki/Government_spending#Government_...

You need to take into account what you get in addition to what you pay.

In American those taxes provide a strong military. Most of the rest of the world are very poorly equipped by comparison. Other countries get health care and education.

Improving foreign policy would be a cheap way to reduce military costs - relying on a militia was the American tradition up until the Cold War and is indeed one of the reasons you have the right to arms.

Keep in mind that the US is a deficit spender, so effective tax should be even lower than that figure.

As other pointed out that is payroll tax, not income tax.

The differences in tax between the US and Australia are not so much in the headline rates as in the deductions.

In the US mortgage interest on a home you live in is tax deductible.

And in the US you get taxed as an economic unit with your spouse and children.

So a home owner with a big mortgage and a spouse at home looking after kids pays much less tax in the US.

Keep in mind that there are many tax tricks you can play here too, like paying yourself dividends and writing off a lot of expenses (speak to an accountant before doing so).

Also the overhead of running a corporation (including lawyer, accountant, payroll, and general insurance) is not much if you're making over $100/hr. It is certainly less than 26.7% (ie, $75 of every $175 minus 15.3%) worth. Most of these costs are fixed, not variable.

my wife is a cpa/cfp, and this is how i set up my company. i write off most stuff (car, office supplies, computer equip, internet, phone, etc), and pay out yearly dividends on top of a base salary. for a one-man corporation, the overhead can be really minimal. if you can get health benefits from your spouse and keep nearly 40 hrs week in billable hours, you'll never look back.

Even using your conservative numbers, this guy is earning almost 3 times what he was previously, a fantastic effort and do envy him :-)

That's 3+ times what he was making while reducing his hours or 6+ times his salary if he is pulling overtime.

Depending on how many hours you bill, maybe. But if you have a steady client or two, bill 35 hours per week (conservative) and work 48 weeks, that's $294k. Yes there are some additional taxes (but only up to the first $105k or something) and keep in mind salaried employees pay half the "self employment" tax too..

Yep, my accountants rule of thumb is after deducting time for admin and other downtime you will be doing well to sell about 60% of your available billable hours. So that about ties up with what you are saying.

Calling that pay rate $175K/yr is beyond conservative. Maybe if he's taking off 2 months a year for vacation (another benefit of contracting!).