Schedule C Tax Tips - 3 Easy Ways to Reduce Self-Employment Tax

Frustrated with the amount of self-employment (SE) tax you pay each year? You should be. The sole proprietor pays twice as much in SE tax (15.3%) as the employee pays in federal payroll taxes (7.65%). What's a Schedule C filer to do? Here are three ways to reduce the dreaded SE tax.

1. Take the home office deduction. Have you been mislead by the never-ending rumor that the home office deduction increases the chances of an audit? Such talk is bogus, and to believe it is to needlessly pay too much tax. Here's why: Don't forget that when you take a deduction on Schedule C, you are not only reducing income tax, you are also reducing SE tax. Some folks think that they are getting the same bang for their buck without the home office deduction because they can deduct mortgage interest and property taxes on Schedule A. But this is foolish thinking, because a Schedule A deduction only reduces income tax, while a Schedule C deduction reduces both income tax and SE tax.

2. Deduct tax preparation fees on Schedule C instead of Schedule A. The logic here is similar to Item #1 above. Tax preparation fees are deductible on Schedule A, but why deduct them there when you can deduct them on Schedule C and get more bang for your deductible buck?

Also keep in mind that when deducted on Schedule A, tax preparation fees are only deductible, along with other "Certain Miscellaneous Deductions", to the extent they exceed 2% of your Adjusted Gross Income. So even though you have enough deductions to itemize them on Schedule A, you may not have enough of these miscellaneous deductions to actually deduct them. That's taxes for ya!

One word of caution, however. You can only deduct tax prep fees on Schedule C to the extent those fees apply to business work done by your accountant. So you will probably have to ask your accountant to breakout his fees into business forms (like Schedule C, Schedule SE, Form 8829 and Form 4562) and non-business forms (like Form 1040 and Schedule A).

Remember, too, that your accountant might also do work for you that is exclusively business related, such as bookkeeping, software consulting, paycheck processing or payroll tax returns. Those types of fees are 100% deductible on Schedule C.

3. When it comes to calculating SE tax, get some help. The self-employment tax calculation is complicated. While the SE tax appears to be a straightforward 15.3%, it is actually a little less than that, for two reasons. First, you pay the SE tax on 92.35% (not 100%) of your Schedule C profit. And second, you get to take a deduction on Form 1040 for 50% of the SE tax. And while you must pay the Medicare portion of SE tax on all your profit, there's a limit to how much profit (plus W-2 wages) are subject to the social security portion of SE tax. How do you navigate those calculations? You don't. You spend a few bucks on a decent tax prep software program and let the computer prevent your head from spinning, or you hire a tax professional.