How to Avoid & Reduce Self Employment Tax? (2025 Guide)

Most LLC members are not considered employees, so no Social Security or Medicare taxes are taken out of their paychecks.

Instead, most LLC owners must pay these fees directly to the IRS rather than as business payroll taxes, which are known as "self-employment taxes" when paid by a small business owner.

Drawing from experience as a business advisor, I've seen firsthand how strategic planning and proper structuring can significantly mitigate self-employment taxes for LLC owners. Leveraging on this knowledge, I will discuss ways to avoid or reduce this devastating tax.

Quick Summary

• To reduce self-employment tax, consider changing your business structure to a corporation.
• Increasing business expenses can lower your net income and self-employment tax but won't affect FICA taxes.
• According to the Tax Foundation, over 50% of business income could be taxed if not properly structured.
• I always highlight that incorporating business wisely can lead to significant tax savings and financial security​.

What Are Self Employment Taxes & Who Needs To Pay Them?

Self-employment tax is a tax on gross income from self-employment in business. It consists of part of Social Security and part of Medicare taxes.

According to the Internal Revenue Service, this tax represents 15.3% of your earnings, with 12.4% allocated for Social Security on income up to a certain threshold and 2.9% for Medicare with no income cap, highlighting the tax's significant impact on self-employed individuals' net income [1].

You should know that any net income from self-employment is subject to the self-employment tax if your total net earnings from all passive activities are \$400 or more.

If your net earnings from self-employment are less than these amounts, you do not have to pay any self-employment taxes.

However, if your total business income from self-employment is more than these amounts, some of your income will be subject to both Social Security and Medicare taxes.

"Taxes are paid in the sweat of every man who labors."

- Franklin D. Roosevelt, Former American Statesman

Tips to Reduce Self Employment Taxes

If you're self-employed, don't assume your business defaults to S corporation status, avoiding separate business income tax. Instead, business income passes to your personal tax, subjecting it to self-employment tax.

This could result in paying over 50% of your business income in taxes.

You can avoid this debacle by setting up your business as a corporation. There are many ways to do this, and you can use an attorney to make sure the process runs smoothly.

Increase Your Business Expenses

As a self-employed person, one way to avoid paying taxable income is simply to reduce your net income from self-employment.

You can do this by increasing the business expense that is allowed as a deduction against your income.

The downside of this approach is that you will have less money from which to pay yourself, but at least you won't have to pay self-employment tax on it.

Note that increasing business expenses does not reduce FICA taxes.

These are federal insurance contributions, and they continue to apply to all monies earned by the corporation and its employees.

You can talk to your accountant or financial adviser about ways to reduce self-employment taxes.

Change Your Business Structure or Form

If you are currently in the process of incorporating, check with your attorney to make sure that they have set up all your final papers.

You might be able to switch from an LLC or S-Corp and still reduce or eliminate self-employment taxes. This is another case where talking with a tax professional really pays off.

Look For Deductions in Other Areas

You might be able to reduce the amount of your self-employment income tax by changing business expenses.

You can take deductions on items not only directly related to running your business but also depreciation or loss on investments in other areas.

These can be reflected in tax deductions in the:

• Rent
• Interest
• Vehicle Use
• Travel
• Meals
• Internet & Phone Bills
• Start-Up Costs
• Advertising

Take Advantage of Tax Cuts

Some tax credits reduce your tax liability dollar-for-dollar, so it makes sense to pursue them.

Take advantage of all the ones you qualify for:

• Child and dependent care credits
• Earned income credit (EIC) and business mileage credit (Milesharing Program - see sidebar)
• Investment tax credit
• Renewable energy credits
• Savers' credit for low-income individuals
• Work opportunity credit
• Working families with children

These tax credits can be taken against your self-employment tax income as well as your earned taxable income from employment.

Invest in Eligible Retirement Accounts

As a corporate attorney, I've seen many clients overlook the benefits of contributing to a traditional IRA, which can significantly reduce taxable income.

In one case, a client managed to qualify for the Earned Income Credit (EIC) simply by adjusting their retirement contributions, despite initially not earning enough to benefit from it.

Many entrepreneurs neglect to save for retirement, but everyone will need to retire sometime, and good financial planning is just as important as good tax planning!

Related Articles:

• How are LLCs Taxed
• What Is the LLC Tax Rate
• LLC Pass-Through Taxation
• How to File Business Taxes for an LLC

Invest in a Health Savings Account (HSA)

This is a qualified savings account that can be used to pay for certain medical expenses while you are still employed and also after you retire.

You can invest money in an HSA, take deductions on contributions, and use the money tax-free to pay for deductible medical expenses if they exceed your annual deductible amount.

The amount of your annual deductible depends on whether you have an individual or family plan.

Drawing from my experience, investing in Social Security and Medicare has been a dual-purpose strategy. It secures your financial future and lowers your taxable income.

You can also enjoy tax benefits even if you don't have a reasonable salary because the benefits apply to everyone, regardless of income.

Make Donations to Charity

You can deduct charitable donations made in cash or property.

If you donate your old computer to a child in need, the donation is deductible even if you could not sell it for much money at an auction because it has no resale value.

The same would be true of any clothing donations. You may not be able to get much for it at a yard sale, but it still has value to someone else.

The services you provide as a volunteer for a non-profit organization can be deductible. Deductions can include the amount of time you put in.

They can also cover travel expenses incurred while providing those services.

FAQs

References:

1. https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes