How Can I Legally Reduce My Self-Employment Tax?
When you work for yourself, you face a unique tax burden. Self-employment tax hits your income at 15.3%, covering both Social Security and Medicare. W-2 employees split this cost with their employers, but when you're self-employed, you pay both halves.
The good news? You can reduce this burden legally with smart tax planning.
Quick Answer
Self-employment tax is 15.3% of your net earnings for tax years 2024 and 2025 (12.4% for Social Security, 2.9% for Medicare).
You can reduce what you owe by:
(1) deducting half your self-employment tax from your income,
(2) claiming all valid business expenses,
(3) deducting 100% of health insurance premiums if eligible,
(4) considering an S corporation election to pay yourself partly in distributions, and
(5) timing income strategically to avoid higher tax brackets.
These strategies are legal and designed to ensure you pay only what you actually owe.
Understanding Self-Employment Tax (Tax Years 2024 and 2025)
The Rate and How It Works
Self-employment tax is 15.3% of your net earnings. This breaks down to:
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12.4% for Social Security (on earnings up to $168,600 in 2024 and $176,100 in 2025)
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2.9% for Medicare (on all earnings, no cap)
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Additional 0.9% Medicare tax if your income exceeds $200,000 (single) or $250,000 (married filing jointly)
You pay self-employment tax if you have net earnings of $400 or more from self-employment (IRS Topic No. 554, Self-Employment Tax).
Who Pays It
You're subject to self-employment tax if you're:
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A sole proprietor
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An independent contractor
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A freelancer
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A partner in a partnership
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A member of a single-member LLC taxed as a sole proprietorship
Strategy 1: Deduct Half Your Self-Employment Tax
How It Works
The IRS lets you deduct the employer-equivalent portion (half) of your self-employment tax when calculating your adjusted gross income.
This doesn't reduce your self-employment tax itself, but it does reduce your federal income tax (IRS Topic No. 554, Self-Employment Tax).
The Math
Example: You owe $7,650 in self-employment tax on $50,000 of net self-employment income.
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Self-employment tax: $7,650
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Deductible amount: $3,825 (50% of $7,650)
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Your taxable income: $50,000 - $3,825 = $46,175
This deduction is calculated on Schedule SE and reported on Schedule 1 (Form 1040), Additional Income and Adjustments to Income.
Where to Claim It
You calculate this deduction on Schedule SE (Form 1040), then report it on Schedule 1 (Form 1040), line 15. This is an "above the line" deduction, meaning you get it whether or not you itemize deductions.
Strategy 2: Deduct All Valid Business Expenses
What You Can Deduct
The IRS allows you to deduct all ordinary and necessary business expenses. These expenses reduce your net income, which in turn reduces your self-employment tax (IRS Topic No. 554, Self-Employment Tax).
Deductible expenses include:
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Office rent or home office expenses
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Office supplies and equipment
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Business travel and mileage
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Advertising and marketing costs
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Professional fees (legal, accounting)
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Business insurance
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Software and subscriptions
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Phone and internet (business portion)
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Continuing education related to your business
The Impact
Example: You have $50,000 in gross income and $10,000 in business expenses.
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Net income: $40,000 ($50,000 - $10,000)
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Self-employment tax: $5,652 (15.3% on 92.35% of $40,000)
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Without deductions: SE tax would be $7,065
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Savings: $1,413
Rules to Follow
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Expenses must be ordinary (common in your industry) and necessary (helpful for your business)
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You cannot deduct personal expenses
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Keep receipts and documentation for all expenses
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Business trips must have a genuine business purpose (not primarily for vacation)
Report your business expenses on Schedule C (Form 1040), Profit or Loss from Business.
Strategy 3: Deduct Health Insurance Premiums
The 100% Deduction
Self-employed individuals can deduct 100% of health insurance premiums paid for themselves, their spouse, and dependents, as long as they have a net profit for the year (IRS Form 7206 Instructions, 2025).
This includes:
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Medical insurance
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Dental insurance
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Vision insurance
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Qualifying long-term care insurance
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Health insurance for children under age 27 (even if not dependents)
Requirements
To qualify:
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You must be self-employed and have a net profit on Schedule C or Schedule F
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The insurance plan must be established under your business
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You cannot deduct premiums for any month you were eligible to participate in an employer-sponsored health plan (yours or your spouse's)
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The deduction cannot exceed your net self-employment income
Where to Claim It
Report this deduction on Schedule 1 (Form 1040), line 17. Use Form 7206 if you have multiple sources of self-employment income or complex situations.
This is another "above the line" deduction available regardless of whether you itemize (IRS Topic No. 502, Medical and Dental Expenses).
Strategy 4: Consider an S Corporation Election
How S Corporations Save on Self-Employment Tax
When you elect S corporation status, you become both an employee and a shareholder. You must pay yourself a reasonable salary (subject to payroll taxes), but you can take additional profits as distributions.
Distributions are not subject to self-employment tax, only income tax (IRS Fact Sheet 2008-25, Wage Compensation for S Corporation Officers).
The Reasonable Salary Requirement
The IRS requires S corporation owners who provide substantial services to receive "reasonable compensation" before taking distributions.
Reasonable compensation is what you would pay someone else to do your job. The IRS considers:
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Your training and experience
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Duties and responsibilities
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Time and effort devoted to the business
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What comparable businesses pay for similar services
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Dividend history
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Compensation agreements
There is no specific formula or safe harbor percentage (like 60/40). Each situation must be evaluated on its own facts (IRS, S Corporation Compensation and Medical Insurance Issues).
The Math
Example: Your business earns $100,000 in net profit.
As a sole proprietor:
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Self-employment tax: $14,130 (15.3% on 92.35% of $100,000)
As an S corporation with $60,000 salary and $40,000 distributions:
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Payroll tax on salary: $9,180 ($60,000 × 15.3%)
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Payroll tax on distributions: $0
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Savings: $4,950
Important Warnings
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Paying yourself too little salary (to maximize distributions) triggers IRS scrutiny
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You must run payroll, file quarterly payroll tax returns (Form 941), and issue yourself a W-2
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There are additional compliance costs and administrative burdens
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Court cases show the IRS aggressively pursues S corp owners who underpay themselves
Real case example: A CPA in Iowa paid himself $24,000 in salary while taking $220,000 in distributions.
The IRS reclassified $151,000 of distributions as wages, resulting in back taxes, penalties, and interest (Watson v. United States, 2010).
Strategy 5: Time Income to Avoid Higher Tax Brackets
How It Works
As a self-employed person, you often control when you receive payment.
By deferring income to the next year, you might stay in a lower tax bracket and reduce both income tax and self-employment tax.
Tax Brackets for 2024 (Single Filers)
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10%: $0 to $11,600
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12%: $11,601 to $47,150
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22%: $47,151 to $100,525
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24%: $100,526 to $191,950
The Math
Example: By December, you've earned $47,000 in 2024. A client owes you $500. If you collect in December:
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$500 taxed at 22% = $110 income tax
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$500 × 15.3% × 92.35% = $71 self-employment tax
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Total tax: $181
If you wait until January 2025:
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$500 taxed at 12% = $60 income tax
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$500 × 15.3% × 92.35% = $71 self-employment tax
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Total tax: $131
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Savings: $50
When This Makes Sense
Income deferral works best when:
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You're near a tax bracket threshold
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You don't need the cash immediately
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You expect similar or lower income next year
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You use cash-basis accounting (most self-employed people do)
What to Do Now
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Calculate your current self-employment tax. Use Schedule SE to figure what you owe. Multiply your net self-employment income by 92.35%, then by 15.3% to estimate your tax (for earnings under the Social Security wage base).
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Track all business expenses. Keep receipts, invoices, and records throughout the year. Use accounting software or a spreadsheet to categorize expenses monthly.
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Deduct your health insurance premiums. If you pay for your own health insurance and have a net profit, claim this deduction on Schedule 1, line 17. Complete Form 7206 if needed.
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Evaluate S corporation status. If your business nets more than $50,000 to $60,000 annually, consult a CPA or tax attorney about whether S corp election makes sense. Factor in payroll costs and administrative burden.
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Review your tax bracket. In November or December, calculate your year-to-date income. If you're near a bracket threshold, consider deferring income or accelerating deductions.
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Pay estimated taxes quarterly. Use Form 1040-ES to calculate and pay estimated taxes four times per year (April 15, June 17, September 16, and January 15). This helps you avoid underpayment penalties.
Common Mistakes to Avoid
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Paying yourself zero salary in an S corporation. The IRS requires reasonable compensation. Paying no salary while taking large distributions is a red flag for audits.
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Deducting personal expenses as business expenses. You cannot write off vacations, personal meals, or family expenses just because you're self-employed. The IRS requires a legitimate business purpose.
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Forgetting to claim the self-employment tax deduction. Half of your self-employment tax is deductible. This is calculated on Schedule SE and reported on Schedule 1. Don't leave this money on the table.
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Not keeping adequate records. Without receipts and documentation, you cannot prove your deductions if audited. Keep records for at least three years from the filing date.
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Misclassifying income to avoid taxes. All income from services you perform is subject to self-employment tax, even if paid as dividends, distributions, or other forms. The IRS looks at substance over form.
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Not making quarterly estimated payments. If you expect to owe $1,000 or more in taxes, you must make quarterly payments. Waiting until April can result in underpayment penalties.
Forms and Resources
Schedule C (Form 1040): Profit or Loss From Business. Report your business income and expenses. Calculate net profit or loss. Available at IRS.gov/forms.
Schedule SE (Form 1040): Self-Employment Tax. Calculate your self-employment tax. Determine your deduction for half of SE tax. Required if net earnings exceed $400. Available at IRS.gov/forms.
Schedule 1 (Form 1040): Additional Income and Adjustments to Income. Claim your deduction for half of self-employment tax (line 15) and self-employed health insurance deduction (line 17). Available at IRS.gov/forms.
Form 7206: Self-Employed Health Insurance Deduction. Use this to calculate your health insurance deduction if you have multiple sources of self-employment income or complex situations. Available at IRS.gov/forms.
Form 1040-ES: Estimated Tax for Individuals. Calculate and pay your quarterly estimated taxes. Includes worksheets and payment vouchers. Available at IRS.gov/forms.
Form 1120-S: U.S. Income Tax Return for an S Corporation. File this annual return if you elect S corporation status. Due March 15 (or 15th day of third month after tax year ends).
Form 941: Employer's Quarterly Federal Tax Return. File quarterly if you have an S corporation and pay yourself a salary. Report wages and payroll taxes.
Publication 535: Business Expenses. Comprehensive guide to deductible business expenses. Available at IRS.gov/publications.
Publication 334: Tax Guide for Small Business. Overview of tax rules for sole proprietors. Available at IRS.gov/publications.
Bottom Line
Self-employment tax is substantial, but you have legal tools to reduce it. Deduct half your self-employment tax and claim all ordinary business expenses. If eligible, deduct 100% of health insurance premiums.
Consider an S corporation if your income supports the administrative burden, but always pay yourself a reasonable salary. Time income strategically when possible. These strategies ensure you pay only what you legally owe while building your business sustainably.
References You Can Check
IRS Topic No. 554, Self-Employment Tax – Internal Revenue Service – Last reviewed October 2025 – https://www.irs.gov/taxtopics/tc554
IRS, Self-Employment Tax (Social Security and Medicare Taxes) – Internal Revenue Service – Last updated October 2025 – https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes
IRS Fact Sheet 2008-25, Wage Compensation for S Corporation Officers – Internal Revenue Service – Published August 2008 – https://www.irs.gov/pub/irs-news/fs-08-25.pdf
IRS, S Corporation Compensation and Medical Insurance Issues – Internal Revenue Service – Last updated October 2025 – https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues
IRS Instructions for Form 7206 (2025), Self-Employed Health Insurance Deduction – Internal Revenue Service – Tax year 2025 – https://www.irs.gov/instructions/i7206
IRS Topic No. 502, Medical and Dental Expenses – Internal Revenue Service – Last reviewed October 2025 – https://www.irs.gov/taxtopics/tc502
IRS Instructions for Schedule SE (Form 1040) (2025) – Internal Revenue Service – Tax year 2025 – https://www.irs.gov/instructions/i1040sse
IRS About Schedule SE (Form 1040), Self-Employment Tax – Internal Revenue Service – Last updated October 2025 – https://www.irs.gov/forms-pubs/about-schedule-se-form-1040