Self-employed and paying more tax than expected?
If you are self-employed, freelancer, or a business owner receiving 1099 income, you are likely paying self-employment tax on top of regular income tax. For many business owners, this comes as an unpleasant surprise.
Self-employment tax is currently 15.3%, covering Social Security and Medicare. Unlike W-2 employees who split this cost with an employer, self-employed individuals are responsible for the full amount.
The good news is that this tax is not fixed. With proper planning, many business owners can significantly reduce it.
What is self-employment tax?
Self-employment tax applies to your net business income, not your gross revenue. That distinction is important.
If your business earns income after expenses, the IRS applies self-employment tax to that remaining profit, up to the annual income threshold set each year.
Because this tax is assessed in addition to federal and state income taxes, it can quickly become one of the largest expenses a business owner faces.
1. Use the self-employment tax deduction correctly
One of the most overlooked basics is that a portion of your self-employment tax is deductible.
While this deduction does not reduce the self-employment tax itself, it lowers your taxable income, which can reduce your overall tax bill.
This is a foundational benefit, but it is only the starting point. On its own, it rarely produces meaningful long-term savings.
2. Reduce the income subject to self-employment tax
Because self-employment tax is calculated on net income, every legitimate business deduction matters.
Common deductions many business owners qualify for include:
Home office expenses
Business use of a vehicle or mileage
Business travel and lodging
Professional services and contractors
Software, tools, and subscriptions
Health insurance premiums for self-employed individuals
Depreciation of business equipment
Accurate bookkeeping is critical here. Missing or improperly tracked expenses often lead to paying tax on income you never truly kept.
Strategic planning can also create deductions by aligning business spending with long-term goals rather than reacting at tax time.
3. Evaluate whether your business structure still makes sense
For higher-earning business owners, entity structure can have the biggest impact on self-employment tax.
Certain business structures allow income to be treated differently for tax purposes, which can dramatically reduce how much income is subject to employment taxes.
This strategy is not one-size-fits-all. It requires:
Consistent profitability
Proper payroll setup
Reasonable compensation analysis
Ongoing compliance
When implemented correctly, the savings can be substantial. When done incorrectly, it can create unnecessary risk.
Why tax planning matters more than tax filing
Most business owners focus on taxes once a year. By then, the numbers are already locked in.
Tax planning works differently. It looks ahead, aligns business decisions with tax rules, and creates a structure that supports long-term savings instead of short-term fixes.
This is where many self-employed individuals leave money on the table year after year.
How The Virtual CPAs can help
At The Virtual CPAs, we help business owners understand:
What strategies actually apply to their situation
Which deductions are being missed
Whether their current structure still makes sense
How to plan proactively instead of guessing
If you are self-employed and unsure whether you are overpaying, the first step is clarity.