Guide
Best Ways to Reduce Self-Employment Tax
Self-employment tax is 15.3% of 92.35% of your net self-employment earnings, so the only ways to lower it are to lower those net earnings legitimately or to change how the income is earned. The main levers are claiming every allowable business expense and depreciation, electing S corporation status and paying yourself a reasonable salary, hiring your children under 18 in a sole proprietorship, and keeping rental income as passive rental income. Retirement contributions, self-employed health insurance and the QBI deduction lower income tax but not self-employment tax.
Self-employment tax is the Social Security and Medicare tax that sole proprietors, most partners and LLC members pay on their business profits, in place of the payroll taxes an employer and employee would split. For many owners it is larger than their federal income tax. The ideas below are legitimate, IRS-recognized ways to reduce it for tax year 2026, with the trade-offs that come with each. Figures that change every year, such as the Social Security wage base, are linked rather than quoted.
1. Claim every ordinary and necessary business expense
Best for: Every sole proprietor and partner
Self-employment tax is figured on net earnings, so every legitimate deduction on Schedule C or the partnership return lowers it. Common ones are missed: business mileage or actual vehicle costs, a qualifying home office, software and subscriptions, professional fees, business insurance, phone and internet business use, and supplies. Good books are what turn these into deductions you can defend.
- Reduces both income tax and SE tax
- Requires records that show the business purpose
2. Use depreciation rules on equipment and vehicles
Best for: Owners buying equipment, tools, vehicles or computers
Federal law now makes 100% bonus depreciation permanent for qualified property acquired after January 19, 2025, and section 179 expensing is also available within the current year's limit. Deducting the cost in the year of purchase lowers net self-employment earnings for that year. The deduction is a timing benefit: it reduces your basis, so a later sale can produce recapture, and South Carolina does not follow federal bonus depreciation for state income tax.
- Permanent 100% bonus for property acquired after January 19, 2025
- Timing benefit, with recapture on sale
- South Carolina adds bonus back for state income tax
3. Elect S corporation status and pay a reasonable salary
Best for: Profitable owners whose earnings are well above a reasonable salary for their role
An LLC or corporation that elects S status on Form 2553 pays its owner-employees wages, which are subject to payroll taxes, and can distribute remaining profit without Social Security and Medicare tax. The IRS requires the salary to be reasonable compensation for the services provided, judged by factors such as training, duties, time spent and what comparable businesses pay. Payroll, a separate corporate return and state filings add cost, so the election tends to make sense only once profits are consistently well above that salary.
- Payroll taxes apply to wages, not to distributions
- Reasonable compensation is required
- Added payroll and return costs
4. Hire your children in a sole proprietorship
Best for: Sole proprietors, or partnerships owned only by the child's parents, with real work for a child to do
The IRS says payments to a child under 18 who works for a parent's sole proprietorship, or a partnership in which each partner is a parent of the child, are not subject to Social Security and Medicare taxes, and payments to a child under 21 are not subject to FUTA. The wages are a business deduction that lowers the parent's net self-employment earnings. The work must be real, the pay reasonable for the work, and the time documented. The exemption does not apply if the business is a corporation, including an S corporation.
- No FICA on wages to a child under 18
- Not available through a corporation
- Pay must match real work
5. Keep rental income as rental income
Best for: Owners who also hold rental property
The Schedule SE instructions say rental income from real estate is generally excluded from net earnings from self-employment. The exception is when you provide substantial services for the convenience of the occupants, as a hotel or some short-term rentals do. Structuring and operating a rental so it stays a rental, rather than a service business, keeps that income outside self-employment tax.
- Real estate rents generally excluded from SE income
- Substantial services for tenants can pull income into SE tax
6. Separate true investment returns from pay for services
Best for: Partners and LLC members, especially those who invest capital but do not work in the business
For partnerships, the Schedule SE instructions say limited partners include only guaranteed payments for services actually rendered, not their distributive share of partnership income. Whether an LLC member can be treated the same way depends on the member's actual role in the business, so get advice before relying on it. Interest, dividends and capital gains are not self-employment income at all. Getting this right is about accurate classification, not relabeling pay for work.
- Limited partners: only guaranteed payments for services
- LLC members: depends on their actual role
- Investment income is not SE income
7. Claim the deduction for half of your self-employment tax
Best for: Everyone who pays SE tax
This does not reduce the self-employment tax itself, but it reduces what the tax costs you overall. The IRS lets you deduct one-half of your self-employment tax when figuring adjusted gross income, which mirrors the employer share of payroll taxes an employer could deduct. It is easy to miss on a hand-prepared or amended return.
- Deducted on Schedule 1 of Form 1040
- Lowers income tax, not SE tax
How self-employment tax is calculated
| Component | Rule |
|---|---|
| Filing threshold | Net earnings from self-employment of $400 or more |
| Base | Generally 92.35% of net self-employment earnings |
| Social Security portion | 12.4%, up to the current year's Social Security wage base (combined with any W-2 wages) |
| Medicare portion | 2.9%, no cap |
| Additional Medicare Tax | 0.9% on earnings above $200,000 for single and most other filers, $250,000 married filing jointly or $125,000 married filing separately |
| Offsetting deduction | One-half of SE tax, deducted in figuring adjusted gross income |
What does not reduce self-employment tax
- Retirement contributions for yourself. IRS Publication 560 has sole proprietors deduct them on Schedule 1 of Form 1040, not on Schedule C, so they lower income tax only.
- The self-employed health insurance deduction. The Form 7206 instructions say it cannot be subtracted when figuring net earnings for self-employment tax.
- The 20% qualified business income deduction. It is taken after adjusted gross income and does not change net earnings from self-employment.
- Simply forming an LLC. A single-member LLC that has not elected S corporation status pays self-employment tax exactly as a sole proprietor does.
Choosing between these strategies
For most owners the first two items are the foundation, and the S corporation election is the biggest structural decision. Run the numbers with the cost of payroll, a separate return and a defensible salary included, and revisit them as profits change. Retirement plans still belong in the plan because they cut income tax, which our list of retirement plans for small business owners covers. Haigler CPA Group models entity and salary decisions as part of tax planning, and our ranked list of small business accountants in Charleston includes other local firms if you are comparing.
Sources
- IRS: Self-employment tax (Social Security and Medicare taxes)
- IRS: Topic no. 554, Self-employment tax
- IRS: Instructions for Schedule SE
- IRS: S corporation compensation and medical insurance issues
- IRS: Family help (hiring your children)
- IRS: Instructions for Form 7206
- IRS Publication 560, Retirement Plans for Small Business
- IRS: Guidance on the additional first year depreciation deduction (Notice 2026-11)
The information on this site is general in nature and is not tax, legal, or accounting advice for your situation. Tax law changes and the right answer depends on facts we would need to review with you. Please speak with a qualified professional before acting on anything you read here.
Questions people ask about this
What is the self-employment tax rate for 2026?
15.3%: 12.4% for Social Security up to the year's wage base and 2.9% for Medicare with no cap, applied to 92.35% of net self-employment earnings. An additional 0.9% Medicare tax applies above $200,000 for single filers or $250,000 for joint filers.
Does contributing to a SEP-IRA or Solo 401(k) reduce self-employment tax?
No. Contributions for yourself are deducted on Schedule 1 of Form 1040, so they reduce income tax but not the self-employment tax figured on your Schedule C profit.
Does an S corporation eliminate self-employment tax?
It replaces self-employment tax with payroll tax on a reasonable salary. Profit distributed above that salary is not subject to Social Security and Medicare tax, but the IRS requires the salary to reflect the value of your services.
Is rental income subject to self-employment tax?
Generally no. The Schedule SE instructions exclude rental income from real estate unless you provide substantial services for the convenience of the occupants.
Can I pay my child to avoid self-employment tax?
If you run a sole proprietorship, or a partnership owned only by the child's parents, wages to a child under 18 are not subject to Social Security and Medicare tax and reduce your net self-employment earnings. The work and pay must be genuine, and the rule does not apply to corporations.
Keep reading
- Best Retirement Plans for Small Business OwnersSEP-IRA, Solo 401(k), SIMPLE IRA, 401(k), profit-sharing and defined benefit plans compared, with 2026 setup deadlines and startup tax credits.
- Best Business Entity Types for South Carolina BusinessesSole proprietorship, partnership, LLC, S corp or C corp? How each is taxed in South Carolina, including the 3% pass-through election and 5% corporate rate.
- Best Small Business Accountants in Charleston (2026)Haigler CPA Group's 2026 list of Charleston-area CPA firms for small businesses: tax, bookkeeping and planning, with what each firm's own site says.
- Biggest Tax Mistakes Small Business Owners MakeEleven costly tax mistakes small business owners make in 2026, from missed estimates and the new $2,000 1099 threshold to payroll deposits and SC depreciation.
- Tax Planning & AdvisoryThe plan that ties entity choice, timing, property and exit decisions together.
- LLC vs. S Corporation Taxes in South CarolinaAn LLC and an S corporation are not two competing entities — one is a state-law structure, the other a federal tax election, and most South Carolina owners can have both. What changes is how much of your profit is exposed to self-employment tax.
- Choosing a Retirement Plan: SEP, SIMPLE or Solo 401(k)The three plans a small business usually chooses between are not ranked. They trade capacity against cost against paperwork, and the right answer changes the moment you hire someone.
- Small BusinessOwner-operated companies, pass-through entities, and the books behind them.
- All Charleston tax & accounting guidesEvery list, choosing a CPA and the tax reference lists.
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