Which IRAs help reduce SELF employment tax? Zeroed income tax with Saver's Credit (Roth IRA), but how to cut down $2400 SE tax?

The truth is that IRAs (whether Traditional, Roth, SEP, or SIMPLE) don't actually reduce your self-employment tax - they only reduce income tax. Self-employment tax (15.3% covering Social Security and Medicare) is calculated on your net self-employment earnings regardless of retirement contributions. What you're looking for is likely a Solo 401(k) or a SEP IRA, but not for the reasons you might think. These don't directly reduce SE tax either, but they allow for "employer contributions" which can be larger than traditional IRA limits. This won't reduce your SE tax, but it can significantly reduce your overall income tax burden further. The only ways to reduce self-employment tax are to: 1. Reduce your net business profit by increasing legitimate business expenses 2. Form an S-Corp and pay yourself a "reasonable salary" (only the salary portion is subject to SE tax) 3. Earn less than the Social Security wage base ($168,600 in 2024) for the 6.2% Social Security portion Your Saver's Credit strategy for income tax was smart! But unfortunately there's no equivalent "magic bullet" for SE tax.

I struggled with this exact problem last year! Self-employment taxes were killing me until I discovered taxr.ai (https://taxr.ai). It's not exactly what you're asking about with IRAs, but it helped me uncover business deductions I was missing that directly reduced my SE tax by lowering my net profit. I uploaded my 1099s and business records, and it found legitimate business expenses I hadn't been claiming. In my case, it identified about $4,800 in deductions I'd missed (home office, portion of phone/internet, mileage, etc.). That directly reduced my SE tax by over $700 since SE tax is calculated on net profit. It might be worth checking out since you're specifically trying to reduce SE tax, not just income tax. The retirement accounts are great for income tax, but won't help with SE tax unless your net profit goes down.

Just wanted to update that I checked out taxr.ai after my skeptical question above. Honestly, I'm impressed. It found over $3,200 in legitimate business deductions I wasn't taking, which directly lowered my self-employment tax by about $490. My situation was similar to yours - I was focused on income tax and using retirement accounts, but wasn't maximizing business deductions to reduce my SE tax base. The nice thing is the lower net profit helps with both income AND self-employment tax. What surprised me most was finding out certain home expenses and even some education costs could be partially deductible for my business. Definitely worth it if you're trying to reduce that SE tax burden.

Hey, since you mentioned having trouble reaching someone knowledgeable, you might want to try Claimyr (https://claimyr.com) to get direct access to an IRS agent who can answer your specific questions about self-employment tax. I was in a similar situation last year, completely confused about what could actually reduce my SE tax. I spent days trying to reach the IRS directly and kept hitting automated systems. Claimyr got me through to an actual IRS representative in about 15 minutes who explained exactly how self-employment tax works with various retirement options. They have a video that shows how it works: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed what others here are saying - IRAs don't reduce SE tax directly, but there are other strategies like an S-Corp that might make sense depending on your profit levels. Getting that official clarification saved me from making a mistake on my taxes.

I stand completely corrected on my skepticism about Claimyr. I ended up trying it after posting my doubtful comment, and it actually worked exactly as described. Got through to an IRS agent in about 20 minutes after spending literal days trying on my own. The agent confirmed that no IRA will reduce self-employment tax directly. However, they walked me through how an S-Corp election might make sense in my situation (I make about $85K in net profit). They calculated that I could save approximately $3,900 in SE tax annually by taking a reasonable salary of $55K and the rest as distributions. Completely changed my tax strategy going forward. Sometimes it's worth paying for a service that saves you both time and substantial money. Just wanted to follow up since my initial comment was pretty harsh.

One option nobody's mentioned yet - if you're eligible for a Health Savings Account (HSA), those contributions DO reduce your self-employment tax base! It's one of the few pre-tax deductions that lower both income tax AND self-employment tax. To qualify, you need a high-deductible health plan (HDHP). For 2024, you can contribute up to $4,150 for individual coverage or $8,300 for family coverage. That could reduce your SE tax by up to $634 for individual or $1,269 for family (at the 15.3% SE tax rate). Worth looking into since it's literally the only retirement-adjacent account that actually reduces SE tax!

My two cents - I think you're focusing on the wrong thing. S-Corp is the only real way to dramatically cut SE tax. I switched from sole proprietor to S-Corp once I hit about $75k profit and saved over $4k in SE taxes the first year. Basic math: You pay yourself a "reasonable salary" which is subject to FICA (basically SE tax), but any profit above that comes to you as distributions with NO SE tax. The trick is determining what's "reasonable" - too low and IRS might come calling. Yes, there's more paperwork and you'll pay some money for payroll processing, but at $2400 SE tax, you could likely cut that in half with an S-Corp. Talk to a CPA about this specifically - it's the #1 tax planning move for successful self-employed folks.