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How to pay less in self-employment taxes | FlyFin

Being self-employed has its perks, like being your own boss and setting up your own work hours. But this freedom comes with a lot of responsibility and taxes that can be complicated. As a self-employed individual, you'll have to pay your own income and self-employment taxes, whereas people employed by a company have these automatically deducted from their paychecks.

Thankfully, there are ways you can  lower the amount of self-employment taxes you pay, even down to $0 in some cases.

What is self-employed tax?

Self-employment tax consists of Medicare taxes and Social Security taxes.

Wondering why self-employed individuals need to pay this additional tax? For regular wage earners, the social security and medicare taxes are withheld from the pay received from employers. However, as a self-employed person or freelancer, you should figure it out yourself using Schedule SE (Form 1040 or 1040-SR).

Self-Employment Tax Rate

The self-employment tax rate set by the IRS is 15.3% of a self-employed individual's net earnings. It consists of a 12.4% Social Security tax which funds the Old-Age, Survivors, and Disability Insurance program, commonly known as Social Security. It provides a payment each month to support retired workers, or workers who have become disabled, as well as their dependents. It also provides benefits to survivors of workers who were insured. A 2.9% Medicare tax (hospital insurance) on net earnings is also part of self-employment tax.

Self-employment deduction

The IRS requires anyone earning $400 or more in self-employment income must file a tax return that includes a Schedule SE, which is used to calculate the amount of SE tax, or self-employment tax, that you owe.

It should be noted that the self-employment tax is not the same as income tax, and you're eligible to deduct between 50% and approximately 57% of your self-employment tax payment from your income tax. The precise amount would depend on your self-employment income.

Two ways to reduce self-employment tax

There are two ways to reduce your tax stress and self-employment tax deduction. Let's look at each of them.

1) Form an S-Corporation

A considerable amount can be saved on your taxes this way, because the income would be different.  Customers or clients would pay your  S-Corp for products or services, instead of paying you directly, and the amount of taxable earned income you have would be less.

Once you form your S-Corp, you'd pay a percentage of the corp's earnings as a salary to yourself and the balance as dividends. The salary portion would count as earned income for you and would be subject to self-employment tax. But dividends, or profits from the business aren't subject to self-employment tax, so you'd reduce your net self-employment income by whatever percentage you take as dividends.

2) Reduce net profit by taking business expenses as deductions

Schedule C is the tax form where you need to report your net profit from self-employment. It should be included as income on your 1040 form and must be used on the Schedule SE to calculate your self-employment tax.

Your net profit equals the gross receipts you earned minus your deductible business expenses. Therefore, the lower your net profit number, the lower your self-employment tax bill.

Thus, to reduce self-employment tax, you should prepare your Schedule C thoroughly and make sure every possible business expense is taken as a deduction.

These business expenses need to be necessary for the operation of your business, in order to be claimed as tax write-offs.

Some common tax deductions include:

  • Home-office deduction
  • Health insurance
  • Continuing education costs
  • Office supplies
  • Business travel
  • Phone and internet bill
  • Business meals
  • Startup costs
  • Advertising costs
  • The qualified business income deduction

FlyFin comes in super handy for tracking your business expenses. Its A.I. automatically fetches all your deductions, saving you a couple of thousand dollars on your taxes and a lot of time!

How to avoid self-employed tax?

You could avoid paying the self-employed tax if your business had more deductions than income in a particular financial year. However, the IRS allows this only for three financial years. After that, the business is considered to be non-performing.

So, the only way to avoid self-employed tax is to claim all the deductions that your business qualifies for. Tracking those expenses can be a nightmare,  that's what FlyFin was built for.

Get the FlyFin app for 100% accurate taxes, eliminating 98% of your work and filing your taxes for you at a fraction of the cost. Powered by A.I. and backed by CPAs, FlyFin finds every possible write-off to save you money at tax time. Try FlyFin's 1099 tax calculator, too, and get the app today.

FlyFin CPA Team

FlyFin CPA Team

With a combined 150 years of experience, FlyFin's CPA tax team includes tax CPAs, IRS Enrolled Agents and other tax professionals, offering users the most comprehensive tax advice and preparation.

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