How much of a self-employed taxpayers self-employment tax may be deducted for AGI

The 15.3 % self-employment tax can be a challenging expense for business owners, but there are ways to lower your self-employment tax burden.

You can reduce the self-employment tax you pay as a business owner—a tax of 12.4% for Social Security and 2.9% for Medicare—by increasing certain tax-deductible business expenses. Also, you may be able to lower self-employment taxes by forming an S-corporation. 

Read on for tips on how to reduce your self-employment tax.

Key Takeaways

• The 15.3% self-employment tax includes a 12.4% Social Security tax and a Medicare tax of 2.9% on all net self-employment income.
• Taking deductions for all eligible business expenses will reduce your self-employment tax bill for the year. 
• Forming an S-corporation might help reduce self-employment taxable income since you'd pay yourself a portion of the company’s earnings as salary and the remaining as dividends.

How To Reduce 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.

Increase Your Business Expenses

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. This will reduce your net business income and correspondingly reduce your self-employment tax. 

You can take deductions for common business expenses like employee wages, insurance, rent and utilities on business space, legal fees, advertising, and office expenses. Deductible business expenses must be ordinary (common and accepted in your industry) and necessary to your business. IRS Schedule C has a complete list of the business expenses you can deduct.

Some other examples of deductible business expenses are:  

• Depreciation, including the Section 179 deduction for buying and using fixed assets, such as a vehicle or machinery
• Expenses related to the use of a car for business purposes
• The percentage of your home that you use for business purposes, if you qualify as a home-based business.

Note

You can’t lower your self-employment tax by taking personal deductions like the standard deduction or itemized deductions. SEP-IRA deductions and self-employed 401(k) deductions also won’t lower your self-employment tax.

Consider Forming an S Corporation

Income from an S corporation is not considered self-employment income and isn’t subject to self-employment tax. This means that your income as an S corporation owner isn’t subject to self-employment tax. 

Of course, no one escapes Social Security and Medicare taxes entirely. Most S corporation officers work as employees, and the IRS requires that they be paid a “reasonable” salary." The Social Security and Medicare taxes on these earnings must be withheld from their salaries.

Self-Employment Taxes With a Low Income or a Loss

Be careful about paying too little into Social Security. In general, you need at least 40 Social Security credits over your lifetime to be eligible for retirement benefits and, for age 31 or older, at least 20 credits in the 10 years preceding your disability to be eligible for disability benefits.

Note

If you have no business income or a business loss for a specific year, you don’t have to pay self-employment tax for that year, but then you also usually can’t get credit for Social Security benefits for that year.

You may be able to get some Social Security credit if your business income is very low. If your self-employment earnings for a year are less than $400, these earnings can still count for Social Security under an optional method of reporting. You can use this method only five times in your life if you’re reporting non-farm income. (You can use the optional method as many times as you want for farm income.)

How to Calculate Self-Employment Tax

The 15.3% self-employment tax is composed of a 12.4% Social Security tax on the first $147,000 of net self-employment income for the year 2022 ($160,200 in 2023) and a Medicare tax of 2.9% on all net self-employment income.

The $147,000 ceiling is called the "Social Security wage base." It represents the maximum amount of income from wages and net self-employment income that's subject to the Social Security tax. This base increases a little each year to adjust for inflation.

If your business income is higher than a specific maximum for a year, you must pay an additional Medicare tax of 0.9% on the income over this maximum. This additional tax is also included in your self-employment tax calculation for the year. 

IRS Schedule SE is used to calculate the total self-employment tax amount for the year. First, you include your net income for the year. Then, your self-employment tax amount is calculated, including Social Security earnings up to the wage base and any additional Medicare tax. The total of your tax is 92.35% of your net earnings from self-employment. 

When you enter information from Schedule SE on to your tax form, you can deduct one-half of this amount, called the “employer-equivalent” portion of your self-employment tax. You still get credit for the entire amount for benefit purposes. 

The total self-employment tax you must pay is added to your personal tax return on Form 1040 or 1040-SR.

Note

You must pay self-employment tax even if you are already receiving Medicare or Social Security benefits.

Frequently Asked Questions (FAQs)

How much can you reduce self-employment tax?

How much you can lower your self-employment tax depends on a number of factors. You might be able to deduct certain expenses, such as the cost of fixed assets you’ve bought, which would lower your taxable income. You may also be able to lower self-employment taxes by structuring your business as an S corporation. 

But you’ll need to consider whether that’s really the right structure for you, and keep up with changing laws. Also, be aware that if you lower your self-employment taxes too much, you may not qualify for Social Security benefits when you want to retire.

What is the 20% self-employment deduction?

Self-employed business owners, including those who own sole proprietorships, partnerships, and S corporations, may be eligible for an additional qualified business income (QBI) deduction of 20%, on top of their regular deductions. This reduces your business income and consequently your self-employment tax.

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