The Self-Employed Tax Handbook

From self-employment tax to retirement plan deductions, everything you need to file correctly and keep more of your business income.

Being self-employed means you are your own employer, which comes with both greater tax responsibility and greater tax-saving opportunities. The most significant difference is the self-employment tax: you pay both the employer and employee portions of Social Security and Medicare, totaling 15.3% on the first $176,100 of net earnings (for 2025), plus 2.9% Medicare on earnings above that.

The key to reducing your self-employment tax burden is maximizing legitimate business deductions. Every dollar you deduct reduces both your income tax and your self-employment tax. Common deductions include home office expenses, business insurance, professional services, retirement plan contributions, and the employer-equivalent portion of your SE tax.

Retirement plan contributions are one of the most powerful tools for self-employed taxpayers. A Solo 401(k) allows you to contribute up to $69,000 for 2025 as both employee and employer, while a SEP-IRA allows up to 25% of net self-employment income. These contributions reduce taxable income immediately while building long-term wealth.

Key Deductions & Credits

Self-Employment Tax Deduction

$1,000 - $6,000

Deduct the employer-equivalent portion (50%) of your self-employment tax as an adjustment to income. This is an above-the-line deduction available to all self-employed taxpayers.

Solo 401(k) or SEP-IRA Contributions

$5,000 - $25,000

Contribute up to $69,000 to a Solo 401(k) or up to 25% of net SE income to a SEP-IRA for 2025, directly reducing taxable income.

Health Insurance Premiums

$3,000 - $15,000

Deduct 100% of health, dental, and long-term care insurance premiums for yourself, your spouse, and dependents as an above-the-line deduction.

Home Office Deduction

$600 - $5,000

Deduct expenses for a dedicated home workspace. Simplified method: $5 per sq ft up to 300 sq ft ($1,500 max). Regular method: actual percentage of home expenses.

Business Insurance

$500 - $3,000

Premiums for professional liability, general liability, errors and omissions, and business property insurance are fully deductible.

Professional Services

$500 - $5,000

Fees paid to accountants, attorneys, consultants, and bookkeepers for business-related services are fully deductible.

Forms You May Need

Schedule C (Form 1040) — Profit or Loss from Business

Schedule SE (Form 1040) — Self-Employment Tax

Form 1040-ES — Estimated Tax for Individuals

Form 8829 — Expenses for Business Use of Your Home

Form 4562 — Depreciation and Amortization

Form 1099-NEC — Nonemployee Compensation

Filing Tips

Pay quarterly estimated taxes to avoid the underpayment penalty. Calculate your liability using Form 1040-ES and pay by each quarterly deadline.
Open a Solo 401(k) before December 31 to make employee contributions for the current year. Employer contributions can be made until the filing deadline.
Use accounting software to track income and expenses in real time. Catching up at year-end leads to missed deductions and errors.
Separate personal and business finances completely. A dedicated business bank account and credit card simplify bookkeeping and strengthen audit protection.
Review your entity structure annually. Switching from a sole proprietorship to an S-Corp can save thousands in self-employment taxes once profits exceed $50,000-$60,000.
Track business mileage from day one using an app. Reconstructing a mileage log at year-end is unreliable and risky in an audit.

Common Mistakes to Avoid

Not making quarterly estimated tax payments, resulting in a penalty even if you pay the full amount by April 15.
Missing the self-employment tax deduction (deducting 50% of SE tax from AGI), which is separate from business deductions on Schedule C.
Failing to contribute to a retirement plan, which is the most tax-efficient way to reduce self-employment income.
Not distinguishing between business and personal expenses, which weakens deductions and creates audit vulnerability.
Underreporting income by excluding cash payments or income below the 1099 reporting threshold, which the IRS can detect through bank deposit analysis.

Recommended Software

TurboTax Self-Employed provides comprehensive Schedule C guidance, SE tax calculation, quarterly payment tracking, and integrates with QuickBooks for seamless expense management.

Review TurboTax

FAQ

How much is self-employment tax?

The SE tax rate is 15.3% on net self-employment earnings: 12.4% for Social Security (on the first $176,100 for 2025) and 2.9% for Medicare (on all earnings). An additional 0.9% Medicare surtax applies to earnings above $200,000 (single) or $250,000 (joint).

What is the difference between a Solo 401(k) and a SEP-IRA?

Both allow high contribution limits. The Solo 401(k) allows employee contributions ($23,500 plus $7,500 catch-up) plus employer contributions (up to 25% of net SE income), with a combined limit of $69,000. A SEP-IRA only allows employer contributions of up to 25% of net income, capped at $69,000. The Solo 401(k) also offers a Roth option.

Do I need to pay self-employment tax if I also have a W-2 job?

Yes, but your W-2 wages reduce your Social Security tax obligation. If your W-2 wages already exceed the Social Security wage base ($176,100 for 2025), you only owe the 2.9% Medicare portion on your SE income. You always owe the Medicare portion on all SE earnings.

Can I deduct business expenses even if my business lost money?

Yes. A net business loss can offset other income like wages or investment income. However, the IRS may question losses that occur year after year. To maintain deductibility, you must demonstrate a profit motive and show that you are running a legitimate business, not a hobby.