Do Deductions Reduce Self-Employment Tax? + FAQs

Yes, claiming eligible business deductions does reduce self-employment tax by lowering the net income that this tax is calculated on.

According to a 2020 QuickBooks Self-Employed survey, over 36% of freelancers admit they don’t pay their taxes, risking hefty IRS penalties. This statistic highlights how many self-employed people are confused about taxes – especially about what deductions can (and cannot) do.

• 💡 What Self-Employment Tax Really Is: Understand the 15.3% extra tax that self-employed people pay and how it differs from regular income tax.

• 💰 How Deductions Shrink Your Tax Bill: See how ordinary business expenses (home office, supplies, etc.) directly lower your taxable income and cut your self-employment tax.

• ⚠️ Mistakes to Avoid (Audit Triggers!): Common pitfalls like thinking the standard deduction or personal expenses will reduce self-employment tax (they won’t) – and how to avoid IRS red flags.

• 📊 Real-Life Scenarios & Savings: Three real-world examples (from side-gig to six-figure freelancer) illustrating how much you save in self-employment tax with and without deductions.

• 🗝️ Key Tax Terms Explained: A quick guide to important entities and concepts (IRS, Schedule C, net earnings, SSA, Form 1040, SECA, FICA) so you can navigate the tax code like a pro.

Direct Answer: Yes – Deductions Can Cut Your Self-Employment Tax (Federal vs. State)

Absolutely – deductions can lower the self-employment tax you owe. Self-employment tax is assessed on your net earnings from self-employment, which essentially means your business profit after deductible business expenses. At the federal level, the IRS calculates your self-employment tax (the 15.3% tax for Social Security and Medicare) based on that net profit number.

So if you claim legitimate business write-offs (for example, office supplies, equipment, travel, or any ordinary and necessary expenses for your trade), those deductions reduce your net profit – and a lower net profit means less self-employment tax. For instance, if you earned $50,000 in freelance income and had $10,000 in business expenses, you’d only pay self-employment tax on $40,000 of net profit instead of the full $50,000. That could save you over $1,500 in self-employment tax right off the bat!

It’s important to note that not all types of “deductions” affect self-employment tax. Federal law distinguishes business deductions (which reduce your business profit) from personal deductions (like the standard deduction or itemized deductions on your Form 1040). Business deductions – reported on forms like Schedule C (Profit or Loss from Business) – do shrink both your taxable income and your self-employment income.

Personal tax deductions (for things like mortgage interest or charity, or the standard deduction everyone gets) only apply to income tax, not to self-employment tax. In other words, you calculate your self-employment tax on your business net profit before subtracting any standard or itemized deductions. Many new freelancers are surprised by this: for example, you might owe self-employment tax even if your overall taxable income is low enough that your income tax is zero. The federal rules make it clear – only expenses directly related to your business operations will reduce that 15.3% self-employment tax bill.

What about state taxes? Here’s some good news: no U.S. state levies a separate self-employment tax equivalent to the federal one. The self-employment tax is strictly a federal tax under the Self-Employment Contributions Act (SECA), funding Social Security and Medicare. That said, your state (and city) may have its own income taxes or business taxes that kick in on your earnings. Most states with income tax start with your federal taxable income or federal Adjusted Gross Income, which already factors in your business deductions.

This means those deductions will also typically reduce your state taxable income (lowering your state income tax). But states don’t impose an extra 15.3% Social Security/Medicare tax on self-employment – you only pay that to the IRS. There are a few nuanced local exceptions: for instance, New York City charges an unincorporated business tax on certain business income, and some states have special business fees or taxes (like Illinois’s personal property replacement tax or California’s LLC fee).

These are not the same as self-employment tax, and they vary by jurisdiction. In general, at the state level, your business deductions still help lower any state income tax you owe, but you won’t face a separate state self-employment tax on top of the federal one. Always check your specific state’s rules – for example, a handful of states might disallow or adjust certain deductions for state purposes – but everywhere in the U.S., the primary self-employment tax burden is federal.

Bottom line: Federally, deducting business expenses reduces your net self-employment income, directly cutting the Social Security and Medicare taxes you pay. And while states will tax your income, they don’t charge an extra self-employment tax – so once you’ve lowered your profit with deductions, you benefit on both federal and state tax fronts. Next, we’ll dive into common mistakes to avoid, because understanding the rules is one thing, but applying them correctly is crucial to truly save on taxes.

Avoid These Common Mistakes That Cost Self-Employed People 💸

Even savvy independent professionals can trip up on tax details. Here are some frequent mistakes self-employed taxpayers make regarding deductions and self-employment tax – and how to avoid them:

• Mistake 1: Thinking Personal Deductions Reduce Self-Employment Tax. It’s a common misconception that taking the standard deduction or other personal write-offs will lower your self-employment tax. Reality: Personal deductions only affect your income tax, not the 15.3% self-employment tax. For example, even if your standard deduction wipes out your taxable income on paper, you could still owe self-employment tax on your business profit.

  • Avoid this by understanding that only business expenses (the ones you list on Schedule C or other business schedules) will reduce your self-employment tax. Don’t bank on personal tax breaks to cut that particular bill.

• Mistake 2: Not Deducting All Eligible Business Expenses. On the flip side, some people under-claim expenses, perhaps out of fear of an audit or simple lack of records. Remember: every legitimate business expense is money in your pocket. Failing to deduct something like your home office, mileage, or equipment means you’re reporting a higher profit than necessary – and paying more self-employment tax than you should. For instance, if you forget to include $2,000 of expenses, that’s about $306 extra in self-employment tax (15.3%) you didn’t need to pay, plus additional income tax.

  • Avoid this by keeping good records (receipts, logs) and claiming all ordinary and necessary expenses. Using accounting software or consulting a tax pro can help ensure you don’t miss out on deductions that could lower your tax.

• Mistake 3: Misclassifying Personal Spending as Business Deductions. While you want to take all valid deductions, claiming personal or non-deductible costs as business expenses is a big no-no. For example, trying to write off your entire personal cell phone bill or a vacation that only had a tiny business purpose can backfire. If the IRS finds you overstated deductions, they will disallow them – meaning your net profit gets increased and you’ll owe additional self-employment tax (plus interest and penalties) on the difference. In tax court, time and again, cases show that unsupported or exaggerated deductions get struck down. (One recent Tax Court case in 2025 disallowed a laundry list of a taxpayer’s Schedule C expenses due to lack of proof, leaving them stuck with a higher tax bill and accuracy penalties.)

  • Avoid this by keeping business and personal expenses separate and only deducting costs that are truly business-related. When in doubt, ask a tax professional if an expense is deductible. It’s better to be slightly conservative than to risk an audit by writing off questionable items.

• Mistake 4: Forgetting About Quarterly Taxes and the Self-Employment Tax Hit. Unlike W-2 employees, self-employed folks don’t have automatic tax withholding taken from their pay. Many first-timers are caught off guard when they realize they should be making quarterly estimated tax payments throughout the year. If you don’t pay enough tax in during the year, you could face penalties at filing time – even if deductions reduced your overall tax. The self-employment tax, especially, can make up a big portion of your tax due (since it’s roughly 15% of your profit).

  • Avoid this by calculating your estimated taxes each quarter, factoring in both income tax and self-employment tax. Mark the due dates (April 15, June 15, Sept 15, Jan 15) and send in payments to the IRS (and state, if applicable). By paying as you go, you won’t be hit with a giant bill (or penalty) in April. Many tax software programs and IRS worksheets can help you estimate these payments once you project your income and deductions for the year.

• Mistake 5: Misunderstanding Business Entity Choices (LLC, S-Corp) and SE Tax. Some self-employed individuals assume that forming an LLC means they’ve avoided self-employment tax, or they hear that an S Corporation magically makes taxes disappear. These strategies can save money but only if done right – and they don’t eliminate taxes entirely. A single-member LLC by default is taxed like a sole proprietorship, which means you still pay self-employment tax on the profits (the LLC is just a legal structure).

  • An S-Corp can reduce self-employment tax because you pay yourself a salary (which incurs payroll tax) and take remaining profit as distributions (not subject to self-employment tax). But the IRS requires you to pay a “reasonable salary” – you can’t just call all your income a distribution to dodge taxes. If you do, the IRS can reclassify those earnings as wages and hit you with back taxes and penalties.

  • Avoid this by getting professional advice before changing your business entity for tax reasons. If you do become an S-Corp, make sure to run payroll for yourself and follow all the rules. And remember, an S-Corp saves on self-employment tax but might lead to other costs (payroll service, additional state corporate taxes, etc.). Weigh the pros and cons (we’ll cover those later) rather than jumping into an entity change blindly.

By staying clear of these mistakes, you ensure that you get the full benefit of deductions without crossing any lines. Next, let’s see how deductions play out in real-life scenarios – this will really cement how much you can save (and what happens if you don’t take those write-offs).

Real-Life Examples and Scenarios: Deductions in Action

Nothing makes the tax rules clearer than seeing the numbers. Below we’ll explore three common scenarios self-employed people face, to illustrate how deductions (or the lack of them) impact the self-employment tax owed. From a freelancer with no write-offs to a side-gigger under the tax threshold to a high-earning consultant, these examples cover the range:

As these scenarios demonstrate, deductions make a big difference. In Scenario 1, one freelancer saved over $1.5k by claiming expenses. In Scenario 2, a tiny side hustle owes nothing in SE tax, partly because expenses might have kept profit below $400. And Scenario 3 highlights a unique case: once you earn above a certain amount, there’s a built-in limit on Social Security tax – effectively a ceiling on that part of self-employment tax. (Medicare tax has no cap, so it keeps applying, with an extra 0.9% for very high incomes, but that additional tax is calculated separately on your tax return.)

Real-world note: The majority of self-employed folks won’t hit the Social Security cap, but many do have a mix of W-2 and freelance income. If you have a day job, the Social Security tax you paid via your employer is credited against the cap. When you file Schedule SE for your side business, it accounts for any wages already subject to Social Security tax. The end result is you don’t overpay – you pay Social Security tax on combined earnings up to $160k or so, and Medicare tax on everything. This is why in Scenario 3, Lisa didn’t have to pay 12.4% on the full $50k of side income.

Before moving on, let’s consider one more angle: aggressively claiming deductions has pros and cons. Yes, it lowers your taxes – but are there downsides? Let’s briefly weigh them:

Overall, the pros of taking all rightful deductions far outweigh the cons for most people – after all, you don’t want to pay more tax than necessary. But be mindful of the trade-offs: keep excellent records to back up your deductions (so audits aren’t a worry), and remember the big picture of your finances (both for personal income needs and eventual Social Security benefits). Many self-employed individuals strike a balance: they deduct everything they’re entitled to, but they don’t artificially create business losses just to avoid tax. It’s about accurately reporting your income – which includes subtracting true expenses.

Having seen how deductions function in practice, let’s connect this to what the tax code actually says. Understanding the law behind these calculations will empower you even further (and it’s not as dry as you might think!).

The Tax Code Unpacked: What the Law Actually Says 📜

You don’t need to be a lawyer to get the gist of how the law treats self-employment tax and deductions. Here’s a plain-English tour of the key points in the Internal Revenue Code (IRC) and regulations that govern this area:

• Self-Employment Tax is Mandated by Law: Under IRC Section 1401, the government imposes a 15.3% tax on self-employment income – that’s the combined rate for Social Security (12.4%) and Medicare (2.9%). This is often called SECA (Self-Employment Contributions Act) tax, and it’s essentially the self-employed equivalent of FICA taxes that employees and employers pay on wages. In short, if you have self-employment earnings, the law says you must pay these taxes to fund Social Security and Medicare.

• “Net Earnings from Self-Employment” – Definition: The tax code (IRC Section 1402(a)) defines net earnings from self-employment as basically your gross business income minus the allowable business deductions attributable to that business. In other words, the law explicitly confirms that ordinary and necessary business expenses (as defined in IRC Section 162) reduce your self-employment income.

  • For example, if you have $100,000 gross from your sole proprietorship and $30,000 of business expenses, your net earnings from self-employment are $70,000 – and that’s the figure on which the 15.3% tax will be calculated. The IRS reinforces this through Form Schedule C (for sole props and single-member LLCs) and Schedule F (for farm income) instructions: you tally up all income, subtract all deductible expenses, and the bottom-line profit (or loss) flows to the self-employment tax calculation. No deduction = no reduction in that tax, by definition. So, the IRC gives you every incentive to claim your business write-offs.

• Certain Income is Exempt from Self-Employment Tax: Not all earnings are treated the same. The tax code carves out some types of income as not subject to self-employment tax. For instance, rental income, dividends, interest, and capital gains are generally excluded from the definition of self-employment income (unless you’re a dealer or actively engaging in a business of selling those assets). So, if you have income from investments or passive rental activities, you usually don’t pay self-employment tax on those (just income tax).

  • Also, if you’re merely a shareholder in a corporation, your share of profits isn’t self-employment income (it might be dividends or distributions). These distinctions come from the same Section 1402, which lists exclusions. Why does this matter? It means the tax code is focused on taxing your earned income from labor or active business efforts for Social Security/Medicare purposes. If you can legitimately structure some of your cash flow as passive income (for example, by renting out a property you own rather than doing a service), you might avoid SE tax on that portion.

  • That said, be careful: if you’re actively performing services, labeling the payments as “rent” or something when it’s really compensation can run afoul of the rules. The tax code and IRS have detailed guidelines on what counts as self-employment earnings – typically, if you perform work or services and get paid, it’s self-employment income unless you’re someone’s W-2 employee.

• Deduction for Half of Self-Employment Tax: The tax code acknowledges it’s a bit tough to pay both employer and employee portions of FICA. So, IRC Section 164(f) (and related IRS provisions) let you deduct the employer-equivalent portion of your self-employment tax as an “above the line” deduction on your Form 1040. Practically, this means when you calculate your federal income tax, you get to subtract 50% of the self-employment tax you paid from your gross income. (It’s called the “Deductible part of self-employment tax” on Schedule 1 of the 1040.)

  • Important: This is a deduction to reduce your income tax, not a reduction in the self-employment tax itself. You still pay the full 15.3%, but you get to write off half of it, which saves you some income tax dollars. In effect, it’s like how an employer deducts their share of payroll taxes as a business expense – as a self-employed person, you’re allowed the same treatment for the “employer half.” The net result is you’re not taxed on the money that went towards the employer portion of Social Security/Medicare.

  • Some people get confused, seeing that they can deduct half their SE tax and thinking they don’t owe that half – but you do owe it, you just also get a deduction later. The tax code formula even factors this in: when you fill out Schedule SE, it initially calculates 92.35% of your net profit as the base. Why 92.35%? Because that’s 100% minus 7.65% (which is half of 15.3%). The IRS essentially lets you exclude 7.65% of your profit from SE tax calculation, which mirrors the half deduction. All this is baked into the law so you’re treated fairly compared to a traditional employee/employer split.

• Relevant Tax Court Rulings: Over the years, courts have weighed in on various self-employment tax issues. For example, courts have consistently upheld IRS decisions to disallow improper deductions, which then increases self-employment tax. If you ever read Tax Court summaries, you’ll notice a pattern: when a taxpayer can’t substantiate a business expense or tries to claim something not actually allowed, the court sides with the IRS and the taxpayer ends up owing the additional tax (plus often a 20% accuracy penalty).

  • A real-world illustration: in a 2025 Tax Court Memo (Zajac v. Commissioner), a consultant had claimed a wide array of expenses (vehicle, travel, personal legal fees, etc.) which the court found were not adequately business-related or documented. The result? Those deductions were thrown out, his taxable income went up, and he had to pay the extra self-employment taxes (and penalties) on those amounts. In short, the tax code and courts demand that deductions be legitimate.

  • On a different note, the courts have clarified who must pay self-employment tax in less obvious situations. A notable example is limited partners in partnerships: Historically, limited partners (who invest but don’t actively work in the business) were exempt from self-employment tax on their share of income. Some people tried to abuse this by labeling themselves “limited partners” even when they were actively involved.

  • In Soroban Capital Partners v. Commissioner (Tax Court, 2023), the court reinforced that if you’re effectively an active partner (even if by title “limited”), your income doesn’t escape self-employment tax. This closed a potential loophole – you can’t just call yourself a passive investor to avoid SE tax if, in reality, you’re working in the business. The takeaway from these rulings is that both the letter and spirit of the law matter: true business expenses reduce SE tax as intended, but tactics or mislabeling to dodge tax will be shut down by authorities.

• IRS and SSA – Who Does What: The tax code creates the self-employment tax, but it’s the IRS that administers and collects it through your tax return. The IRS provides forms like Schedule SE to compute the exact tax, and you pay it as part of your regular tax filing (Form 1040). Once collected, the Social Security Administration (SSA) gets notified of your earnings. Each year of self-employment earnings counts toward your Social Security credits and benefits (just as a W-2 salary would). It’s all integrated: paying self-employment tax means you’re contributing to your future Social Security retirement, disability, and Medicare entitlement.

  • Many people don’t realize this connection – but if you under-report your income to avoid tax, you could also be reducing your future Social Security checks. The law basically treats your reported net self-employment income as if it were “wages” for Social Security. That’s why accurate reporting (with deductions appropriately applied) not only affects your tax bill now, but also things like Social Security work credits and benefit calculations.

The U.S. tax code explicitly allows business deductions to reduce the income on which self-employment tax is based. It also provides a few relief measures (like the half-tax deduction and the income exclusions for certain types of income) to ensure fairness. Understanding these provisions helps you see why following the rules benefits you. You’re not just randomly plugging numbers into a form – you’re applying specific code sections that were crafted to measure your income correctly and give you breaks where appropriate.

Now that we’ve demystified the law itself, let’s clear up a major area of confusion for many taxpayers: the difference between self-employment tax and income tax. It’s crucial to know how they interact (and where they don’t) so you can plan better.

Self-Employment Tax vs. Income Tax: Know the Difference ⚖️

Self-employment tax and income tax are two very different taxes that often hit the self-employed at the same time. Here’s how to tell them apart, and why it matters:

• What Each Tax Is For: Income tax is the tax on your taxable income – which includes earnings from all sources (wages, business profits, interest, etc.) minus various deductions and credits. It’s the familiar federal (and possibly state) tax that’s calculated on a graduated scale (10%, 12%, 22%, up to 37% at the federal level, depending on income).

  • Self-employment tax, on the other hand, is specifically the 15.3% flat tax on net self-employment earnings that goes to Social Security and Medicare. Think of self-employment tax as your payroll tax for being your own boss: it’s essentially the combination of employer and employee contributions you’d pay on a paycheck, but since you’re self-employed, you cover both shares yourself.

• How They’re Calculated: Income tax has a lot of adjustments, deductions, exemptions, and credits that can reduce your tax or even zero it out. For example, everyone gets a standard deduction (or itemized deductions), and you might get credits for children, education, etc. These all come into play to determine your taxable income and then the tax due on that.

  • Self-employment tax is much more straightforward: you calculate it on Schedule SE using your business net profit (from Schedule C or other business forms). Aside from the Social Security wage cap and the minor tweak of using 92.35% of your profit for the calculation, there are no deductions or credits that directly offset self-employment tax. Whether you made $10,000 or $100,000 in self-employment net income, you apply the 15.3% (split into Social Security and Medicare portions) uniformly. If your business profit is low, self-employment tax could be relatively small; if your profit is high, you’ll pay more (until hitting the Social Security limit).

  • Crucially, the standard deduction, personal exemptions (back when they existed), or itemized deductions do not reduce the amount of self-employment tax. Those come into play after, for income tax only. This is why someone can owe, say, $3,000 in self-employment tax but have zero income tax liability – they had enough personal deductions/credits to erase income tax, but their $20k of freelance profit still yields SE tax.

• Different Rate Structures: Federal income tax is progressive – meaning the tax rate increases as your income goes up through brackets. You might pay 10% on the first chunk of taxable income, 12% on the next chunk, and so on. State income taxes, if applicable, have their own rates/brackets. Self-employment tax is basically a flat rate (again, 15.3%) on your business profit, regardless of whether your overall income is high or low.

  • There’s a nuance: the Social Security portion (12.4%) stops at a certain income (the wage base), making the effective rate drop for income above that cap. And for very high earners, there’s that additional 0.9% Medicare tax on income over $200k (single) / $250k (married) – but note, even that additional Medicare tax is computed separately and applies whether you’re employed or self-employed on the excess income. So effectively, for most people under the cap, self-employment tax is a flat 15.3%. Meanwhile, their income tax might be 0%, 10%, 22%, etc., depending on totals and deductions.

• Payment and Reporting: Self-employment tax is reported annually on your Form 1040 (it flows from Schedule SE to the “Other Taxes” section of your tax return). But because it can be significant, you’re expected to pay it throughout the year via estimated taxes (as mentioned earlier). Income tax is also paid through withholdings (if you have any W-2 jobs) or estimated payments. When you send an estimated tax payment to the IRS, part of that payment covers your income tax and part covers your self-employment tax – it’s usually a combined amount.

  • At year-end, your 1040 will tally everything: you’ll calculate your income tax after deductions and credits on one side, and separately calculate your self-employment tax on Schedule SE. Then those are added together (along with any other taxes like say a penalty or household employment tax, etc.) to get your total tax bill. If you’ve prepaid enough, you get a refund; if not, you owe more. The key point is: Self-employment tax is in addition to income tax. Many first-time freelancers don’t realize this, and they might budget for, say, 10-12% income tax but forget the extra 15.3%. That can lead to an unpleasant surprise.

• Deductions and Credits – Who Affects What: We touched on this, but to summarize: business deductions reduce both income tax and self-employment tax by cutting your profit. Personal deductions/credits reduce only your income tax. For example, the Qualified Business Income (QBI) deduction (the 20% pass-through deduction introduced by tax law in 2018) is a valuable income tax break for many self-employed folks – but it does not reduce your self-employment tax at all. You calculate QBI after figuring your net profit. So you might get a nice income tax deduction on 20% of your profit, but you’ll still pay 15.3% SE tax on the full profit.

  • Similarly, a tax credit like the Earned Income Credit could reduce your income tax (and even give a refund), but you’d still owe SE tax on your self-employed earnings. On the flip side, something like a retirement plan contribution (SEP-IRA, Solo 401k) is an adjustment to income – it lowers your taxable income for income tax, but those contributions are not business expenses, so they do not lower your net self-employment income. This often catches people by surprise: you put $10k into a SEP IRA, which is great for income tax (it’s deductible on your 1040), but you’ll still pay SE tax on that $10k because it was part of your Schedule C profit. Always distinguish in your mind: “Is this deduction reducing my business profit, or is it a personal deduction coming later?” Only the former will help with SE tax.

• Different Beneficiaries: Income tax revenues go to the U.S. Treasury’s general fund (and state treasuries for state tax). Self-employment tax (Social Security and Medicare) goes to trust funds for those specific programs. Why mention this? It underscores that by paying self-employment tax, you’re essentially contributing to your own future benefits (Social Security retirement, Medicare coverage). Some people resent the self-employment tax because it feels like an extra hit, but it’s funding something that (hopefully) you’ll receive back in the form of Social Security checks or medical coverage after 65. Income tax, conversely, is just general government funding.

  • This difference sometimes helps psychologically: you can see the self-employment tax as paying into a system you’ll benefit from. And because of that, the rules around it are a bit different – you can’t wiggle out of it with deductions the way you can with income tax, because then you’d be shortchanging your future benefits. The system is designed to collect on essentially every dollar of labor earnings to keep Social Security solvent.

In essence, self-employment tax and income tax run on parallel tracks. When you’re self-employed, you have to account for both. Deductions that reduce your net business income will affect both tracks, but many personal tax provisions affect only the income tax side. Keeping the two taxes straight will help you plan: for instance, when setting aside money for taxes, remember to allocate for that ~15% self-employment tax in addition to whatever income tax percentage fits your bracket. And if you’re looking for ways to lower your overall tax burden, know that business expenses are your friend for both taxes, whereas things like the standard deduction won’t help your SE tax at all (but are still valuable for income tax!).

Next up, let’s define some of the key terms and entities that we’ve been mentioning. A solid grasp of these will round out your understanding and make the tax process much less intimidating.

Key Terms and Entities Every Self-Employed Taxpayer Should Know

When dealing with self-employment taxes and deductions, you’ll encounter a mix of agencies, forms, and concepts. Let’s break down the most important ones in simple terms:

Familiarizing yourself with these terms makes the whole process less mysterious. When your accountant or tax software starts throwing around words like “Schedule C” or “SE tax” or “Section 1402(a)”, you’ll know exactly what’s going on. This knowledge, combined with the strategies and explanations from earlier, puts you in control of your finances.

---

FAQs: Common Questions from Self-Employed Folks

Q: Does the standard deduction reduce my self-employment tax?
A: No. The standard deduction (or itemized deductions) only lowers your income tax. It does not reduce the self-employment tax on your business profits.

Q: If my net self-employment income is under $400, do I have to pay self-employment tax?
A: No. If you have less than $400 in net earnings from self-employment for the year, you generally owe no self-employment tax (but you still need to file a return if you meet other filing requirements).

Q: Do I have to pay both income tax and self-employment tax on my business income?
A: Yes. Self-employment tax is in addition to income tax. You’ll pay the 15.3% SE tax on your net self-employed profit, plus income tax on that profit (after deductions) at your normal tax rate.

Q: I formed an LLC – does that mean I don’t pay self-employment tax anymore?
A: No. A single-member LLC is taxed like a sole proprietorship by default, so you still pay self-employment tax on the LLC’s net profit. Only if you elect S-Corp status (and pay yourself a salary) can you potentially save on SE tax.

Q: Can an S-Corporation actually save me self-employment tax?
A: Yes. With an S-Corp, you pay yourself a reasonable salary (subject to payroll taxes) and take remaining profits as distributions not subject to self-employment tax. This can save money, but you must follow IRS rules and handle extra paperwork.

Q: Does the 20% Qualified Business Income (QBI) deduction reduce my self-employment tax?
A: No. The QBI deduction only lowers your income tax. You still calculate self-employment tax on your full net business income before the 20% deduction.

Q: If my business has a loss, do I still owe self-employment tax?
A: No. If your business deductions exceed income (net loss), you won’t owe self-employment tax for that year. In fact, no SE tax is due until you have at least $400 in net profit.

Q: Do self-employed people pay more in Social Security taxes than employees do?
A: Yes. Effectively, self-employed individuals pay double what an employee pays for Social Security/Medicare (since you cover both halves). However, you get to deduct the employer half on your tax return to soften the blow.

Q: Will taking a lot of deductions increase my audit risk?
A: No – not if they’re legitimate. The IRS looks for unusual or excessive claims. As long as your deductions are ordinary, necessary, and you have records, taking them should not by itself trigger an audit.

Q: Should I hire a CPA or tax professional for self-employment taxes?
A: Yes, if you feel unsure. A tax professional can ensure you’re claiming all deductions, correctly calculating taxes, and complying with federal and state rules. It’s often worth it for peace of mind and potential savings.