Many new business owners cringe at the idea of paying an additional 15.3% of their hard-earned cash into self-employment taxes. The good news is, there are ways to reduce the amount you owe.
Track all business expenses. Since self-employment taxes applied to net earning rather than your gross income, deductible business expenses will reduce the amount you owe. Be sure to track and take advantage of all tax deductions.
Take an above-the-line deduction. The tax code allows self-employed people to deduct half of their total self-employment tax as an above-the-line deduction. This deduction mirrors the employer portion of Social Security and Medicare that would be paid by your boss if you worked for someone else. Take your calculated self-employment tax and divide it in half. The result goes on line 14 of Schedule 1 attached to your Form 1040.
Make an S-corp election. Some LLC members can reduce their self-employment tax burden by electing to have their LLC taxed like an S corporation. This is because S corp owners pay Social Security and Medicare taxes only on their salary, which LLC members pay self-employment taxes on 100% of their share of the LLC’s profits. However, making an S corp election isn’t right for everyone. Talk to a tax professional to determine whether it’s the right move for you.
