20 Ways to Reduce Self-Employment Taxes
Discover smart, legal ways to slash your self-employment taxes and keep more of your hard-earned money—because why pay more than you have to?
- Alyana Aguja
- 7 min read
Self-employment taxes can take a significant chunk of your income, but with the right approach, you can legally reduce your tax liability and boost your bottom line. From opting for S-corp status and taking advantage of retirement accounts to writing off home office expenses and business mileage, there are hundreds of strategies to leave more money in your wallet. With smart tax-saving strategies, you can decrease self-employment taxes, increase your financial security, and build your business with confidence.
1. Choose S-Corporation Status
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Rather than paying self-employment tax (15.3%) on every last penny of your net income, an S-corp enables you to take a fair salary (subject to payroll taxes) and the remainder as distributions, which are not subject to self-employment tax. For instance, if you have $100,000, you can take a $50,000 salary (paying payroll taxes on that alone) and the remainder as distributions, saving you thousands. Be sure to always have your salary be “reasonable” to stay clear of IRS investigation.
2. Subtract Home Office Expenses
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If you regularly use a dedicated area of your home for business, you can deduct home office expenses on rent/mortgage, utilities, and internet. For example, if your office occupies 10% of your house, you can deduct 10% of your rent, electricity, and other relevant expenses. You can apply the simplified option (e.g., $5 per sq. ft., not exceeding 300 sq. ft.) or the actual expense method.
3. Max Out Retirement Contributions
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Self-employed can minimize taxable income by contributing to Solo 401(k)s or SEP IRAs. If you earn $80,000 and put $20,000 in a Solo 401(k), you’re only taxed on $60,000. Not only does this minimize self-employment tax, but it also gets you saving for the future in a tax-deferred status.
4. Write Off Business Equipment
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Under Section 179, you can expense the full amount of business equipment, including laptops, cameras, or furniture, in the same year you acquire them. If you acquire a $2,000 laptop for business use only, you can expense the entire $2,000 rather than spreading it over time. This reduces taxable income and self-employment tax directly.
5. Use Health Savings Accounts (HSAs)
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If you have an HDHP, you can put pre-tax dollars into an HSA and lower taxable income. A self-employed individual putting in $4,150 (individual) or $8,300 (family) in 2024 can save much money on taxes while paying for medical bills. HSAs carry over and accumulate tax-free, similar to a second retirement account.
6. Deduct Business Mileage
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If you drive for work, you can write off 65.5 cents per mile (2023 figure). Suppose you drive 10,000 miles for meetings with clients or deliveries. Your write-off is $6,550, and your taxable income decreases. Log your miles accurately using software like MileIQ or Everlance.
7. Hire Your Spouse or Children
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Employing your spouse can give them a salary and benefits, lowering your taxable income. If you employ your child under 18 in a sole proprietorship, their income is exempt from payroll taxes, and you can pay them up to $14,600 (2024) tax-free under the standard deduction. Just be certain they’re doing real work!
8. Take Advantage of the Qualified Business Income (QBI) Deduction
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The QBI deduction enables qualifying self-employed persons to deduct 20% of their business income. If you are taxed on a $100,000 income, you might get a deduction of $20,000, so your taxable would be $80,000. It applies to sole proprietors, S-corps, and LLCs but disappears as incomes rise.
9. Prepay Expenses Before Year-End
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To decrease taxable income, prepay business expenses such as rent, software memberships, or advertising before December 31. If you normally spend $5,000 on advertising and prepay next year’s membership fees, you lower this year’s taxable income by that same amount. This is most effective if you are a cash-basis taxpayer.
10. Open a Health Reimbursement Arrangement (HRA)
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If you own an S-corporation and your spouse is an employee, you can establish an HRA to pay medical bills tax-free. For example, if your family has $10,000 in medical bills, your business can reimburse them, a tax-free business expense. This plan is suitable for family businesses.
11. Take the Section 199A Deduction
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Section 199A permits a 20% deduction of qualified business income if you have a pass-through business. Hence, if your business income is $50,000, you may qualify for a deduction of $10,000. It suits individuals below income thresholds ($182,100 single, $364,200 married for 2024).
12. Apply the Augusta Rule
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Augusta Rule (IRC Section 280A) enables homeowners to rent their home to their business for up to 14 days per year tax-free. If you entertain clients, host conferences, or do content shoots at home, you can charge your business a reasonable rental value and claim the expense. For instance, if fair market rent is $500 daily, you can claim $7,000 tax-free.
13. Establish an Accountable Plan
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An accountable plan permits an S-corp to pay employees (including yourself) tax-free for business-related expenses. This might include home office, internet, phone charges, and travel, lowering taxable income without activating payroll taxes. The catch is detailed documentation of expenses.
14. Deduct Professional Development Costs
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If you go to conferences, online courses, or coaching programs that are industry-related to your business, these are completely tax-deductible. A $3,000 digital marketing course lowers your taxable income by $3,000. Hold onto receipts and make sure the course is industry-specific to your business.
15. Establish a Roth Solo 401(k) for Future Tax-Free Distribution
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A Roth Solo 401(k) doesn’t lower taxes today but enables tax-free withdrawals in retirement. If you anticipate higher taxes in the future, this is an excellent method to accumulate tax-free income while maintaining retirement funds available. Contributions accumulate tax-free indefinitely, making it a strong long-term plan.
16. Deduct Business Meals (50-100%)
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Dining with clients, partners, or colleagues is 50% deductible, and dining for company functions (such as team celebrations) can be 100% deductible. If you dine out $5,000 annually for business, you can deduct $2,500, lowering taxable income. Keep receipts itemized and record with whom you dined and the purpose.
17. Use Tax-Loss Harvesting
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If you are an investor, you can sell losing stocks to deduct self-employment income. For instance, if you have $5,000 in investment losses, you can use it to deduct $5,000 in taxable income, reducing self-employment tax. This is an excellent strategy for investors with capital losses.
18. Utilize Business Credit Cards for Rewards & Deductions
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Business credit cards reward cashback, points, and interest deductions as taxable expenses when spent exclusively for business. Should you incur business spending of $20,000, you can accumulate $1,000 as cashback, reducing expenses. Further, credit card yearly fees and interest (incurred for business) are also tax-deductible.
19. Plan Income Across Several Years
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If you’re projecting a high-income year, you can delay payments or invoices to January to lower the current year’s tax burden. For instance, if you have $50,000 invoiced in December, sending it out in January might cut this year’s tax bill. It’s particularly beneficial for those who are close to income phase-out levels.
20. Invest in Business Insurance & Legal Protections
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Business liability insurance, errors & omissions insurance, and cybersecurity policies are all tax-deductible. If your policy costs $2,500 annually, that’s $2,500 off taxable income. This not only reduces taxes but also protects your business from financial risks.