How to Reduce Self-Employment Taxes Legally
Self-employment tax is one of the biggest burdens for business owners. These legal strategies can significantly reduce what you owe.
How to Reduce Self-Employment Taxes Legally
The Self-Employment Tax Burden
Self-employed individuals pay:
- 12.4% Social Security (on first $176,100)
- 2.9% Medicare
- Total: 15.3% on all net self-employment income
Strategy 1: S-Corp Election
Elect S-Corp status, pay yourself a reasonable salary, and take additional profits as distributions.
- Salary subject to payroll taxes
- Distributions are NOT subject to self-employment/payroll taxes
Example savings: On $120,000 profit with $80,000 salary:
- SE Tax on full $120,000: ~$18,360
- Payroll taxes on $80,000 salary: ~$12,240
- Annual savings: ~$6,120
Strategy 2: Maximize Business Deductions
Every dollar of legitimate business deduction reduces:
- Federal income tax (up to 37%)
- Self-employment tax (15.3%)
Strategy 3: Retirement Plan Contributions
SEP-IRA and Solo 401(k) contributions reduce self-employment income.
Strategy 4: Health Insurance Deduction
Self-employed individuals can deduct 100% of health insurance premiums from self-employment income for the purposes of SE tax calculation.
Strategy 4: Section 199A QBI Deduction
The 20% QBI deduction can effectively reduce your income tax on business income.
Self-employed and paying too much in taxes? Schedule a consultation to restructure for maximum savings.