How to Reduce Self-Employment Tax

Why Reducing Self-Employment Tax Matters

If you're self-employed, you're paying both the employer and employee portion of Social Security and Medicare—currently a combined 15.3% on your net earnings. That adds up quickly. Without a strategy, high earners can easily lose $15,000 to $30,000+ per year in self-employment tax alone. Fortunately, there are proven ways to reduce this burden legally and responsibly.

Step-by-Step: Reduce Self-Employment Tax with an S Corp Strategy

Step 1: Understand What Self-Employment Tax Covers

• 12.4% goes to Social Security (up to $168,600 of income in 2024)

• 2.9% goes to Medicare (no income limit)

• An additional 0.9% Medicare surtax may apply over $200K (single) or $250K (married)

Source: IRS.gov

Step 2: Form an S Corporation (or Elect S Corp Tax Status)

• If you're a sole proprietor or single-member LLC, consider filing Form 2553 to elect S Corporation status.

• This allows you to split your income into:

  • Reasonable salary (subject to SE tax)

  • Distributions (not subject to SE tax)

    
    

Step 3: Set a Reasonable Salary

• Your salary must reflect what someone would reasonably be paid for similar work.

• IRS audits often focus on this figure, so use:

  • Industry comps

  • Historical earnings

  • Time spent working in the business

Example: If your business nets $150,000, you might pay yourself a salary of $70,000 and take $80,000 in distributions—saving ~$12,000 in SE tax.

Step 4: Start Payroll and File Correctly

• Use a payroll provider to withhold taxes, issue pay stubs, and file quarterly returns (941s).

• Don’t forget:

  • W-2 at year-end

  • 940 for unemployment

  • State payroll taxes if applicable

    
    

Step 5: Track Distributions and Maintain Clean Books

• Keep distributions separate from salary and owner reimbursements.

• Use a clean chart of accounts and accounting software like QuickBooks or Xero.

  
  

Pro Tips from Experience

• Make the S Corp election early in the year to capture full-year tax benefits.

• Reevaluate salary each year as your business grows.

• Combine this strategy with retirement plans (like a Solo 401(k)) for even more tax savings.

• Keep minutes and resolutions to document salary decisions and distributions.

  
  

Common Pitfalls to Avoid

• Setting your salary too low—a red flag for audits

• Forgetting to run payroll or file quarterly payroll returns

• Commingling personal and business funds

• Electing S Corp status without understanding state-level tax rules

  
  

Final Checklist: SE Tax Strategy

✅ Confirm business is eligible for S Corp

✅ File Form 2553 timely

✅ Set a reasonable salary

✅ Start payroll and submit quarterly filings

✅ Track distributions properly

✅ Document decisions with meeting minutes

✅ Work with a tax advisor to stay compliant

Need help reducing your self-employment tax? Talk to our Tax Advising team.

We'll help you implement the right SE strategy for your income, goals, and business structure.