Self Employment Tax Deductions: A Comprehensive Guide

Being self-employed gives employees the freedom to choose when and how to work. However, it also comes with uncertain income brackets and tax handling. To ease it, self-employment tax deductions can reduce the tax burden.

If you are an international business hiring and expanding through self-employed workers, managing payments and compliance across borders can be challenging. International business challenges make tax rules more complex and tax compliance more critical. 

Knowing your deductions helps you save money and avoid tax surprises. In this blog, learn about self-employment tax, self-employment tax brackets, and how much self-employment tax is deductible. Let’s get started!

Understanding Self-Employment Tax

Self-employment tax is the tax an employee pays if they work remotely for themselves. It covers Social Security and Medicare, just like the payroll taxes for regular employees. But instead of an employer handling it, the employees are responsible for calculating and paying it.

What is Self-Employment Tax?

Self-employment tax (SE tax) consists of two parts:

• Social Security Tax (12.4%): funds retirement, disability, and survivor benefits.
• Medicare Tax (2.9%): covers hospital insurance.

This tax ensures that self-employed professionals contribute to these programs like regular employees. They report and pay SE tax using Schedule SE (Form 1040 or 1040-SR). They can also deduct half of their SE tax from their taxable income, reducing their debts.

Who Must Pay Self-Employment Tax?

One pays self-employment tax if:

• Their net self-employment income is USD 400 or more a year.
• They earned at least USD 108.28 as a church employee.

It applies to sole proprietors, independent contractors, freelancers, and small business owners. Unlike employees, self-employed individuals must pay the full SE tax themselves. This applies regardless of age or whether one is already collecting Social Security benefits.

Self Employment Tax Rate

For 2024, the self-employment tax rate is 15.3%:

• 12.4% for Social Security (only on the first USD 168,600 income).
• 2.9% for Medicare (on all self-employment income).

If the maximum amount of combined wages and self-employment income exceeds USD 200,000 (single) or USD 250,000 (married filing jointly), you pay an extra 0.9% Medicare tax.

Key Self-Employment Tax Deductions

Self-employed professionals can lower their taxable income by claiming various general liability deductions. These deductions help reduce their overall tax burden and allow them to keep more earnings. 

Proper tax planning ensures you maximize savings while staying compliant with tax laws.

Self Employment Tax Deduction

Employees who work themselves pay the employer's and employee's portions of Social Security and Medicare taxes. 

However, they can deduct half of their self-employment tax from your taxable income. This lowers the adjusted gross income (AGI) and reduces the amount of tax they owe.

Health Insurance Premiums Deduction

If self-employed professionals pay for their health insurance, they can deduct the full cost of premiums for themselves, their spouse, and their dependents. 

This includes medical, dental, and long-term care insurance. To qualify, employees must not be eligible for an employer-sponsored plan.

Home Office Deduction

If a self-employed person uses a dedicated space in their home for work, they can claim a home office deduction. There are two ways to calculate this:

• Simplified method: Deduct USD 5 per square foot, up to 300 square feet.
• Regular method: Deduct actual expenses like rent, utilities, and maintenance based on the percentage of their home used for work.

Retirement Plan Contributions Deduction

Saving for retirement helps reduce the taxable income for an employee. They can contribute to:

• SEP-IRA: Deduct up to 25% of their net earnings, with a limit of USD 69,000 (2024).
• Solo 401(k): Deduct contributions as both an employer and an employee, up to USD 69,000 (or USD 76,500 if 50 or older).
• SIMPLE IRA: Allows pre-tax contributions, reducing taxable income.

Business Expenses Deductions

Many expenses related to running a business are tax-deductible. Some common deductions include:

• Office supplies and equipment: computers, printers, and stationery.
• Rent and utilities: You can deduct the cost if an employee rents an office.
• Travel expenses: flights, hotels, and meals for business trips.
• Advertising and marketing: website costs, social media ads, and print materials.‍
• Vehicle use: mileage or actual expenses of the car used for work

Maximizing Your Self-Employment Tax Deductions

Reducing your tax burden as a self-employed professional requires smart planning. By taking full advantage of available deductions, you can keep more of your income while complying with tax laws. The key is tracking expenses, planning, and using the right tools.

Effective Record-Keeping

Self-employment tax rates depend on an independent contractor's or freelancer's total earnings, and different income levels are taxed at different rates. Proper record-keeping is essential for claiming deductions. Keep detailed records of all business-related expenses, such as office supplies, travel expenses, utilities, rent, and professional services.

Unlike salaried employees, self-employed individuals pay taxes throughout the year. This means making quarterly estimated tax payments to avoid penalties. They can:

• Estimate their total income for the year.
• Set aside money for taxes from each payment they receive.
• Pay taxes on time to avoid interest and penalties.

Consulting a Tax Professional

While hiring a professional costs money, it often pays off by reducing your tax bill significantly. A tax expert or accountant can help:

• Find additional deductions you may have missed.
• Ensure compliance with tax laws.
• Optimize your tax strategy to save more money.

Utilizing Tax Software

Many tax software platforms connect with bank accounts and expense-tracking apps, making tax preparation easier and more efficient. These tools help simplify the filing process by:

• Tracking deductible self-employment tax automatically.
• Calculating estimated tax payments accurately.
• Filing tax returns electronically with the IRS.

Future of Self-Employment Tax Deductions

Tax laws change every year. The IRS adjusts tax rules to keep up with inflation and prevent people from unfairly moving into higher tax brackets. This process, known as bracket creep, ensures that your self-employment tax burden does not increase just because of inflation.

Upcoming Tax Law Changes

Several tax changes will impact self-employed individuals in 2025. The standard deduction will increase, allowing employees to deduct more from their taxable income. 

• Married couples filing jointly can claim USD 30,000, while single filers get USD 15,000. 

• The Earned Income Tax Credit (EITC) will also rise, helping low and middle-income earners save more on taxes.

• Another big change is in retirement savings. The 401(k) contribution limit will increase to USD 23,500, allowing people to set aside more for the future while lowering their taxable income. 

• If they are 50 or older, they can still make catch-up contributions, but new rules will apply for those aged 60-63, increasing their limit to USD 11,250.

• The IRS also adjusts Alternative Minimum Tax (AMT) exemptions and estate tax credits. These changes could impact high earners and those planning their estates.

Adapting to Changes

As tax rules shift, self-employed individuals need to stay informed. They should plan their deductions wisely and adjust their financial strategies based on new tax laws. 

They must be aware if they contribute to Roth IRAs since the contribution income limit is rising. In 2025, single filers earning between USD 150,000 and USD 165,000 can still contribute, up from USD 146,000 to USD 161,000 in 2024.

Future changes could impact employees' benefits if they rely on Social Security. Some political proposals aim to remove taxes on Social Security income, but the outcome is still uncertain. If such a law passes, it could shorten the program’s lifespan.

Practical Steps to Claiming Deductions

Knowing how to claim self-employment tax deductions correctly helps lower your tax bill and keeps you compliant with tax laws. Here’s a simple guide to filing your taxes and maximizing deductions.

Filing Schedule SE

• Step 1: Calculate income and expenses

The first step for self-employed workers is to list all their earnings and subtract their business expenses. Some clients may give them a 1099 form, which reports payments they received. However, not all payments come with a 1099, so keeping track of invoices, receipts, and bank statements is mandatory.

• Step 2: Determine profit and loss

Next, they should subtract their expenses from their total earnings. If the earnings are higher than the expenses, they have a net profit. If expenses exceed earnings, they have a net loss, which can sometimes lower their tax liability.

• Step 3: Compute self-employment tax with Schedule SE

A self-employed individual can fill out Schedule SE (Form 1040) to calculate this tax. They can deduct half of their self-employment tax from your taxable income. 

Using Schedule C for Business Expenses

• Step 4: Fill out Schedule C

The employee should use Schedule C (Form 1040) to report the earnings and expenses. This form helps the IRS understand:

• Their total income from self-employment
• The expenses they are deducting
• Whether their business made a profit or loss

Some common deductible expenses include:

• Office supplies and equipment
• Internet and phone bills
• Travel and lodging costs for business trips
• Marketing and advertising expenses
• Rent for office or workspace

If the expenses are small, they may qualify to file a simpler form called Schedule C-EZ.

Reporting Health Insurance Premiums

• Step 5: Report health insurance premiums

Employees who pay for their health insurance can deduct the premiums on their tax return. This includes:

• Health, dental, and vision insurance
• Coverage for themselves, their spouse, and dependents

To claim this deductible self-employment tax, an individual can report the total amount paid on Schedule 1 (Form 1040) under ‘Adjustments to Income’. This deduction lowers the taxable income but does not reduce self-employment tax.

• Step 6: Make Quarterly Tax Payments

A self-employed individual pays taxes throughout the year. Instead of waiting until the end of the year, they need to estimate and pay taxes every three months.

• To calculate these payments, they can use IRS Form 1040-ES, which includes:
• A worksheet to estimate their annual income
• Vouchers to submit payments by mail (or pay online)

Failure to pay quarterly taxes on time may result in penalties and interest. Therefore, taxpayers should always check the IRS estimated tax payment schedule and set aside money annually to cover their taxes.

How Skuad Can Help

Managing self-employment taxes can be overwhelming. However, detailed records, complying with IRS regulations, and using tax software can make self-employment tax deduction easier. Tracking expenses properly helps you claim deductions and reduce your tax burden.

If you work with independent contractors, handling payments and tax compliance can be complex, especially across different countries. Skuad’s Agent of Record (AOR) platform simplifies the process. It helps businesses hire, onboard, and pay contractors in over 160 countries while guaranteeing adherence to local laws.

With Skuad, you can focus on growth without worrying about tax rules. Book a demo today to make global hiring seamless.

FAQs

What self-employment taxes are deductible?

The self-employment tax deduction includes home office costs, health insurance, business travel, retirement contributions, car expenses, office rent, and more. It lowers taxable income and reduces overall tax liability.

What is the 20% self-employment deduction?

Eligible self-employed individuals and small business owners can deduct up to 20% of their qualified business income from their taxable income, commonly known as the 20% self-employment deduction or QBI deduction. This deduction is available for tax years ending on or before December 31, 2025.

How much tax do you pay if you are self-employed?

Self-employed individuals pay a 15.3% tax on net earnings, 12.4% for Social Security and 2.9% for Medicare.

Why is a 30% tax for self-employed?

If one falls under the 30% income tax slab and opts for the old tax regime, they might have to pay around 30% tax, including self-employment tax. However, deductions like insurance premiums and business expenses can lower your tax liability.

Do I file my LLC and personal taxes together?

LLC with one member is viewed as a single entity and is taxed as part of your return unless you file Form 8832 to be taxed as a corporation.