Self-employment tax is how the government collects Social Security and Medicare contributions from people who work for themselves. When you have an employer, you each pay half. You pay 7.65% out of your paycheck and your employer matches that with another 7.65%. When you’re self-employed, you’re both the employer and the employee, so you pay the full 15.3%.

That 15.3% breaks down into two parts. Social Security is 12.4%, which applies to the first $168,600 of net earnings in 2024. Medicare is 2.9% on all net earnings with no cap. If your net self-employment income exceeds $200,000 as a single filer or $250,000 filing jointly, an additional 0.9% Medicare tax kicks in on the amount above that threshold.

The tax is calculated on your net self-employment income, meaning your gross revenue minus your business expenses. This is important because it’s the first and most straightforward way to reduce it. Every legitimate business expense you deduct lowers not just your income tax but your self-employment tax too. That $500 a month in software subscriptions, the mileage you drive for business, your office expenses. All of it reduces the number that gets multiplied by 15.3%.

You do get a small break. The IRS lets you deduct half of your self-employment tax on your personal return. This doesn’t reduce the SE tax itself, but it lowers your adjusted gross income, which reduces your income tax.

The biggest strategy for reducing self-employment tax is electing S-corp status. When your business is a sole proprietorship or single-member LLC, all of your net profit is subject to SE tax. With an S-corp election, you pay yourself a reasonable salary and take the remaining profit as distributions. Only the salary portion is subject to payroll taxes (the equivalent of SE tax). The distributions are not. If your business nets $120,000 and you pay yourself a reasonable salary of $60,000, you just cut your SE tax exposure in half. The IRS requires that the salary be “reasonable” for the work you do, so you can’t pay yourself $20,000 and take $100,000 in distributions. But done correctly, this is a legitimate and widely used strategy.

S-corp status does add complexity. You’ll need to run actual payroll, file quarterly payroll returns, and file a separate business tax return. The savings need to justify those extra costs, which is why this strategy usually makes sense once your net income consistently exceeds $50,000 to $60,000 per year.

Retirement contributions are another effective tool. A SEP-IRA lets you contribute up to 25% of your net self-employment earnings. A Solo 401(k) lets you contribute as both employee and employer, potentially sheltering even more. These contributions reduce your taxable income and, depending on your business structure, can reduce your SE tax base too.

If you’re self-employed and paying for your own health insurance, those premiums are deductible as well. This deduction reduces your income tax but not your SE tax directly. Still, it’s money that stays in your pocket.

The best approach depends on how much your business is earning, what structure you’re operating under, and where you want to be in the next few years. Working with someone who provides small business tax and bookkeeping services makes a real difference here because the savings from the right structure can easily be thousands of dollars a year. If you’re not sure whether an S-corp election or other strategy makes sense for your situation, getting your business tax return handled by someone who understands these decisions can help you stop overpaying.