As a self-employed individual, you’re responsible for paying both the employee and employer portions of Social Security and Medicare taxes, known as the self-employment tax. This 15.3% tax can eat into your hard-earned income, but there are several strategies you can employ to reduce your tax liability.
1. Take Advantage of the Self-Employment Tax Deduction
The self-employment tax is deductible from your income, which means it reduces the amount of income subject to federal and state income taxes. For example, if you earn $10,000 in self-employment income, you would pay $1,530 in self-employment tax. However, the self-employment tax deduction would reduce your taxable income to $8,470, saving you $566 in federal income taxes.
2. Reduce Your Self-Employment Income
Self-employment tax is only applied to your net business income after deducting all allowable business expenses. Therefore, maximizing your tax deductions can significantly reduce your self-employment tax liability. Some common tax deductions for self-employed individuals include:
- Office expenses (rent, utilities, supplies)
- Equipment and machinery
- Travel expenses
- Health insurance premiums
- Retirement contributions
3. Form an S Corporation
An S corporation is a type of business structure that allows you to avoid self-employment tax. When you form an S corporation, you become an employee of the corporation and receive a salary. The corporation then pays you dividends, which are not subject to self-employment tax.
4. Defer Income
If you expect to be in a lower tax bracket in the future, you can defer income to reduce your current self-employment tax liability. This can be done by contributing to a retirement account or by delaying the invoicing of clients.
5. Get Help from a Tax Professional
Navigating the complexities of the tax code can be challenging, especially for self-employed individuals. A tax professional can help you identify all available tax deductions and credits, and develop a tax plan that minimizes your tax liability.
Frequently Asked Questions
Q: What is the self-employment tax rate?
A: The self-employment tax rate is 15.3%.
Q: How can I reduce my self-employment tax?
A: You can reduce your self-employment tax by taking advantage of the self-employment tax deduction, reducing your self-employment income, forming an S corporation, deferring income, and getting help from a tax professional.
Q: Is there a way to avoid self-employment tax altogether?
A: Yes, you can avoid self-employment tax by forming an S corporation.
Q: What are some common tax deductions for self-employed individuals?
A: Common tax deductions for self-employed individuals include office expenses, equipment and machinery, travel expenses, health insurance premiums, and retirement contributions.
How The Self Employment Tax Works (And How You Can Avoid It!)
FAQ
How much can you reduce self-employment tax?
How can I reduce my self-employed tax bill?
Can you get out of paying self-employment tax?
How do I reduce self-employment tax?
The two most common ways to reduce self-employment tax are by increasing business expenses and changing your business structure. Self-employment tax paid by business owners is calculated based on the net income of your business for the year. The only guaranteed way to lower your self-employment tax is to increase your business-related expenses.
Does self-employment reduce tax?
While it does not reduce your self-employment tax, it reduces the total amount of tax you pay by lowering your taxable income. The IRS allows business owners and entrepreneurs to deduct all “ordinary and necessary” business expenses. Here, “ordinary and necessary” is the operative phrase.
Can I avoid paying self-employment tax?
It is difficult to avoid paying the self-employment tax entirely, but you can reduce the amount of self-employment tax you owe. The two most common ways to reduce self-employment tax are by increasing business expenses and changing your business structure.
How do I reduce se taxes?
One way to reduce SE taxes is to reduce the amount of taxable net income. SE taxes are generally paid by sole proprietors who file a Schedule C reporting income from their unincorporated businesses along with their personal federal income tax returns.