FICA burden

W-2 employees pay 7.65% FICA; the employer pays the other 7.65%. Self-employed pays both halves (15.3% combined SE tax) but deducts half on Schedule 1. Net cost: roughly 12.4% on the bottom line vs 7.65% for an employee — a meaningful difference at all income levels.

Income tax deductions

A W-2 employee gets the standard deduction (or itemizes) but cannot deduct unreimbursed business expenses (TCJA eliminated the 2% miscellaneous itemized deduction through 2025). A self-employed taxpayer deducts business expenses on Schedule C, which reduces income tax AND SE tax — a double benefit.

Retirement contributions

A W-2 employee can contribute to a 401(k) only if the employer offers one. A self-employed taxpayer can establish a SEP-IRA, SIMPLE IRA, or solo 401(k) and contribute much more than an employee's 401(k) limit (especially with the solo 401(k)'s combined employee + employer structure).

Health insurance

A W-2 employee with employer health coverage pays premiums pre-tax through payroll deduction (excellent treatment). A self-employed taxpayer takes the self-employed health insurance deduction on Schedule 1 — also pre-tax for income tax, but does NOT reduce SE tax (which is the W-2 employee's pre-tax advantage).

QBI deduction

Self-employed (and other pass-through) owners may claim the 20% QBI deduction. W-2 employees do NOT — the deduction is only for trade-or-business income, not wages. This is a meaningful advantage for self-employed taxpayers below the threshold.

Where the IRS publishes guidance on this topic

The IRS publishes a layered set of free resources on most small-business tax topics: a relevant publication (usually one of Pub 334, 463, 535, 587, 946, 560, or 583), the instructions to the relevant form, the "Small Business and Self-Employed Tax Center" landing pages on IRS.gov, and the Audit Techniques Guides written for IRS examiners. Reading the agency's own materials is the cheapest tax education available. They are written in plain English, updated annually, and they reflect exactly the framework an examiner will apply if your return is selected.

How experienced filers approach this

Experienced self-employed filers and the CPAs who advise them treat this question as a recurring planning exercise rather than a one-time decision. They model the multi-year tax impact rather than just the current year, document the reasoning in a short workpaper that survives staff turnover and software changes, and revisit the analysis annually as facts and laws change. The discipline is not difficult — a half-day in January with last year's return, the current-year IRS publications, and a spreadsheet — but it is rare among DIY filers, which is precisely why it produces outsized results.