Yes, you can reduce self-employment tax in 2025—if you choose the right entity, track deductions properly, and plan ahead. The S Corporation structure, retirement contributions, and year-round tax strategy are key ways to cut your liability. But each strategy must be implemented correctly to avoid IRS penalties.
What Is Self-Employment Tax—and Why Does It Hurt?
If you’re self-employed or run a small business, you owe 15.3% in self-employment taxes on your net income (12.4% Social Security + 2.9% Medicare). Unlike W-2 employees, you’re paying both the employer and employee share of payroll tax.
This is on top of federal and state income tax, so without a plan, self-employed taxpayers can lose 30–40% of their income to taxes.
Top Ways to Reduce Self-Employment Taxes in 2025
✅ 1. Elect S Corporation Status
Once your business is making $50K+ in annual profit, it may be time to switch to an S Corporation. Here’s why:
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You pay yourself a reasonable salary (subject to employment taxes).
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Any profit beyond that comes to you as distributions, which are not subject to self-employment tax.
💡 Example:
If you net $100,000 as a sole prop, you pay SE tax on all $100K.
If you’re an S Corp with a $50K salary, you only pay payroll taxes on $50K.
📌 Explore our S Corp Tax Planning Services
✅ 2. Deduct Health Insurance and Retirement Contributions
As a self-employed person, you can:
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Deduct health insurance premiums for yourself and your family
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Contribute to Solo 401(k) or SEP IRA accounts
For 2025:
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Up to $66,000 total contribution allowed in a Solo 401(k) (if you qualify)
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These contributions reduce your net profit—and your self-employment tax burden
✅ 3. Optimize Your Business Deductions
Every legitimate business expense reduces your taxable income. Common deductions include:
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Home office (if used exclusively)
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Mileage and vehicle expenses
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Equipment, software, and subscriptions
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Internet and phone bills
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Continuing education or certifications
✅ 4. Hire Your Spouse or Kids (Legally)
If your spouse or children do legitimate work in your business:
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Their wages are deductible
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They may pay zero federal tax if under the standard deduction threshold
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No payroll taxes apply if you’re a sole prop hiring a child under 18
This turns family support into a legal tax deduction.
✅ 5. Use Strategic Timing with Expenses and Income
If you’re cash-based:
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Prepay deductible expenses before year-end
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Delay income collection until January (if you can afford to)
This allows you to shift income into a lower-tax year and pull forward deductions for immediate benefit.
Final Word: Don’t Let the IRS Take More Than It Should
The self-employment tax hits hard—but it’s not unavoidable. With a proper strategy, you can reduce or restructure your tax exposure significantly.
At Polaris Tax & Accounting, we specialize in proactive tax planning for individuals and small business owners. We’re not just here for tax season—we’re here for the strategy.