Work Hard, Pay Less: Reduce Self-Employment Taxes

6 Minute Read

If you’re self-employed or a real estate investor, every dollar you earn is hard-earned. But without the right tax strategies, the IRS could end up keeping more of your income than necessary.

In this article, we’ll walk you through how to maximize deductions and reduce self-employment taxes, helping you audit-proof your finances and take full advantage of what the tax code allows.

Why Self-Employment Taxes Hit So Hard

If you're self-employed, you're responsible for both the employer and employee portions of Social Security and Medicare taxes. That adds up to 15.3%, and that's before income tax.

That means if you're earning $100,000 net, you could be sending over $15,000 to the IRS just in self-employment tax. Add income tax on top, and it's clear why strategic planning is essential.

Key Strategies to Minimize Self-Employment Taxes

1. Set Up an S-Corporation

If you’re operating as a sole proprietor or LLC, you’re likely paying too much in self-employment taxes. Electing to be taxed as an S-Corporation allows you to split your income between salary and distributions. You’ll only pay self-employment tax on the salary portion, not the distributions.

Example: If you earn $120,000 and a reasonable salary for your work is $60,000, you pay self-employment tax on only $60,000 instead of the full $120,000.

2. Deduct Business Expenses Aggressively, But Honestly

Track and deduct all ordinary and necessary business expenses, such as:

• Home office (calculated accurately)

• Mileage and vehicle costs (keep a log!)

• Office supplies

• Professional services (legal, tax, software)

• Continuing education and certifications

The IRS allows deductions for anything directly related to earning your income. Keep clean, detailed records to support your claims.

3. Leverage Retirement Contributions

Reduce your taxable income by contributing to:

• SEP IRAs

• Solo 401(k)s

• SIMPLE IRAs

These accounts allow you to defer taxes now and build long-term wealth, a win-win.

4. Hire Your Spouse or Children Strategically

Hiring your spouse or children (if they legitimately help in your business) can shift income and reduce your overall tax liability, especially if you provide benefits like retirement contributions or health insurance.

Bonus Tips for Real Estate Investors

While rental income is often not subject to self-employment tax, some investors may still get hit depending on how they manage their properties. Here are two big opportunities:

• Use Cost Segregation to Maximize Depreciation

Accelerate depreciation on parts of your property to reduce your taxable income now. This can lead to significant upfront deductions, especially on newly acquired or improved properties.

• Take Advantage of the Real Estate Professional Status (REPS)

If you qualify as a Real Estate Professional, you can deduct passive losses against active income—something most investors cannot do. This can lead to tens of thousands in tax savings annually.

Protect Your Time and Money with Professional Guidance

You didn’t go into business to become a tax expert, but we did. At Cornerstone CPA, we specialize in helping real estate investors and self-employed professionals take advantage of the tax code, not fall victim to it.

Let us show you what’s possible when you pair hard work with smart planning.