Self-employment offers flexibility, control over your work, and the opportunity to be your own boss. But it also comes with additional responsibilities, like paying taxes on your own as a self-employed person.
Self-employed taxes, which cover Social Security and Medicare contributions that are typically partially covered by employers for their individual employees, can take a significant chunk out of your income. The good news is that there are ways to minimize what you owe, without skirting your legal obligations.
We went straight to the experts to break down self-employment tax, explain how to calculate it, and provide you with tips on how to minimize self-employment tax burden and keep more of your hard-earned income.
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What is self-employment tax?
Self-employment tax is a combination of two taxes: Social Security and Medicare.
When you work for an employer, these taxes are automatically deducted from your paycheck, and your employer matches the contribution. But when you’re self-employed, you’re responsible for both the employee and employer portions of these taxes.
How much is self-employment tax? The self-employment tax rate doesn’t have tax brackets like income tax. Instead, it is a flat tax rate of 15.3%, which includes:
- 12.4% for Social Security (up to a certain income limit, which in 2024 is $160,200)
- 2.9% for Medicare (with no income limit)
If your net earnings exceed $200,000 (or $250,000 if you're married filing jointly), an additional 0.9% Medicare tax applies.
How to calculate self-employment tax—with an example
You can use self-employment tax calculator to figure out what you owe—or you can follow these simple steps to calculate your taxes yourself:
- Determine your net earnings: This is your total income from self-employment, minus any deductible expenses.
- Multiply your net earnings by 92.35%: As a self-employed individual, you’re only taxed on 92.35% of your earnings.
- Apply the 15.3% self-employment tax rate: Multiply the result from step 2 by 15.3% to determine how much you owe in self-employment taxes.
For example, if your net earnings are $50,000:
- $50,000 x 92.35% = $46,175 (the amount of income that is subject to self-employment tax)
- $46,175 x 15.3% = $7,062.78 (self-employment tax owed)
Remember, this tax is separate from your regular income tax, and it’s important to set aside funds to cover both.
8 tips to reduce self-employment tax
Now that you know how this self-employed tax works, learn how to reduce your self-employment tax with strategies to decrease what you owe.
1. Take advantage of the self-employment tax deduction
This tax deduction means you only pay self-employment tax on 92.35% of your earnings. Additionally, when you file your taxes, you can deduct the employer-equivalent portion (50%) of your self-employment tax from your income.
This won’t reduce the self-employment tax itself, but it can lower your taxable income.
Does the standard deduction reduce self-employment tax? No, the standard deduction only reduces your taxable income for income tax purposes, not self-employment tax. However, you can deduct half of your self-employment tax when calculating your adjusted gross income (AGI), which can help lower your overall income tax but does not directly impact the self-employment tax itself.
2. Maximize business expense deductions
By deducting ordinary and necessary business expenses, you can reduce your net income, which in turn lowers your self-employment tax.
Some common deductions include:
- Home office deduction: If you use part of your home exclusively for business, you may qualify for the home-office deduction. This can include a portion of your rent, mortgage, utilities, and maintenance costs.
“The home office deduction can provide substantial savings, whether using the simplified method or calculating the deduction based on the percentage of your home used for business,” says David Blain, chartered financial analyst (CFO) and CEO of an independent financial advisory firm, BlueSky Wealth Advisors.
- Vehicle expenses: If you use your car for business purposes, you can either deduct the actual expenses (like gas and maintenance) or use the IRS standard mileage rate.
- Supplies and equipment: Anything you need to run your business, such as office supplies, computers, or software, can be deducted as a business expense.
- Professional services: Fees paid to accountants, lawyers, or other professionals for business-related services are deductible.
- Health insurance premiums: “One big tax benefit is that self-employed people can totally write off health insurance premiums,” says Ethan Keller, President of Dominion, a global network of legal and financial consultants. “Every health insurance premium paid for the individual, spouse, and dependents can be deducted as long as the year shows a net profit. This deduction helps to control the self-employment tax load by lowering taxable income, thus lowering the overall taxes due.”
- Interest paid on business loans and credit cards: “One can deduct the interest on purchases even if a personal credit card is used for company costs,” Keller says. “Claims of these deductions lower taxable business income, thus lowering the total self-employment tax.”
3. Contribute to a retirement plan
Saving for retirement is not only a smart financial move for your future, but it can also help reduce your self-employment tax. Contributions to certain retirement plans are tax-deductible, meaning they reduce your taxable income. Options include:
- SEP IRA (Simplified Employee Pension Individual Retirement Account): You can contribute up to 25% of your net earnings from self-employment, up to a maximum of $66,000 in 2024.
- Solo 401(k): This plan allows you to contribute as both an employer and employee. For 2024, the employee contribution limit is $22,500 (or $30,000 if you’re 50 or older), plus up to 25% of your net earnings as the employer.
By reducing your taxable income with retirement contributions, you can lower both your income tax and your self-employment tax.
4. Hire family members
If you run a family business, hiring your spouse or children can provide tax savings. When you pay them a salary, you can deduct their wages as a business expense. Additionally, their income may be taxed at a lower rate, and they won’t be subject to self-employment tax if they work as employees.
If you hire your children under 18, you may also avoid paying Social Security and Medicare taxes on their wages, further reducing your tax burden.
5. Take advantage of Section 179 deduction
The Section 179 deduction allows you to deduct the full cost of qualifying equipment or property in the year you purchase it, rather than depreciating the expense over several years.
This can be especially helpful if you need to invest in new equipment or technology for your business, as it reduces your taxable income immediately, lowering your self-employment tax.
Currently, the maximum Section 179 deduction is $1.16 million, with a phase-out threshold of $2.89 million.
6. Form an S-corporation (S-corp)
“Consider the optimal business structure for your situation,” Blain says. “For instance, an S-corporation allows you to pay yourself a reasonable salary and distribute remaining profits as dividends, reducing self-employment tax.”
An S-corporation is a type of business structure that allows the company to pass its income, losses, deductions, and credits through to its shareholders for federal tax purposes. This means that the business itself doesn't pay federal income taxes; instead, shareholders report the company's profits and losses on their personal tax returns, helping to avoid double taxation.
With an S-corporation, you can pay yourself a reasonable salary and take the rest of your profits as distributions. While your salary is subject to self-employment tax, distributions are not.
It's a good idea to consult with a tax professional before forming an S-corporation, as there are additional requirements and fees involved.
7. Deduct half of your self-employment tax
The IRS allows you to deduct 50% of your self-employment tax when calculating your adjusted gross income (AGI).
“The IRS permits a deduction of half of the taxes from taxable income, lowering the total tax burden instead of taxing the whole amount,” Keller says. “This lessens the federal income tax load even if it does not immediately lower self-employment tax.”
8. Make estimated tax payments
To avoid penalties, self-employed individuals are required to make estimated tax payments throughout the year. While this won’t reduce your tax liability, paying your taxes in quarterly installments can help you manage cash flow and avoid a large tax bill at the end of the year.
Additionally, staying on top of your estimated payments ensures you don’t get hit with unexpected penalties or interest charges. “Carefully tracking your income and expenses is key,” Blain says. “Keep records of business-related costs like supplies, travel, and vehicle use.”
Take charge of your self-employment taxes today
Reducing your self-employment tax may seem challenging, but with careful planning and by taking advantage of the deductions and strategies available, you can significantly lower your tax burden. From deducting half of your self-employment tax to claiming business expenses and exploring the benefits of forming an S-corporation, every little step adds up.
Remember, tax laws can change, and your business may evolve, so it’s always wise to consult a tax professional to make sure you’re maximizing your tax-saving opportunities. “Employing tax reduction strategies and working with experts can help self-employed individuals keep more of what they earn,” Blain says. “Self-employment brings both opportunities and challenges, but with proper planning you can thrive financially as your own boss.”
Taking control of your taxes means more money stays in your pocket, allowing you to reinvest in your business and achieve greater financial freedom. Paying self-employment tax is an unavoidable part of being your own boss, but there are many ways to reduce what you owe.