Do itemized deductions reduce your self employment tax?

Question

We are planning to purchase a home,and want to get the most tax benefits out of our interest deduction....when I do the planning calculators, it doesn't appear that this huge "deduction" reduces my taxes that much at all....If I switched to being a salaried employee, and not self employed, would that be better?

Answer 1

NO - self-employment taxes are 15.3% of your 'net self-employment income'. That same amount is paid even if you are a salaried employee (but your employer pays half). It is "social security and medicare tax" You never get any portion of that back until you retire (at least we all hope you will). A home mortgage or other interest deduction can reduce your federal INCOME taxes if you itemize deductions (work through 'schedule A' to see if that is beneficial). If your 'self-employment' could be conducted in your home, you may be able take 'business' deductions for a portion of your home and/or a 'home office' deduction. This will reduce your income tax and your self-employment taxes (by lowering your net income).
FREE ADVICE: Don't let "a little thing" like "income tax reduction" prevent you from purchasing a home. The financial benefits in the long run are far better than saving a few 'income tax dollars' now.

Answer 2

The self-employment tax is calculated on your self-employment income (bottom line of schedule C). It isn't affected by itemized deductions.

If you were a salaried employee, then itemized deductions would be subtracted from your adjusted gross income before your taxes were calculated. But since your net income from self-employment is also added in before the itemized deductions are subtracted, if the income stayed about the same, it wouldn't matter.

The reason the deductible mortgage interest and real estate taxes might not make a lot of difference in your taxes is that if you don't itemize, you get a standard deduction instead, so your only benefit from itemizing comes from having itemized deductions MORE than the standard - and the benefit is a percent of that amount, whatever your tax bracket is.

Answer 3

Itemized Deductions do not reduce Self-Employment Income. Why? Primarily because itemized deductions are associated with personal assets; whereas
Self-Employment income and/or deductions relate to "business" assets.

In your situation, it sounds like that you pay a substantial amount of Social Security (Self-Employment Tax - same thing). It also sounds like that you were issued a 1099-Misc and reported the income on your Schedule C.

Whether you switch from being self-employed to being a salaried employee
is a choice "you" cannot make. It is entirely up to your employer or the source of your income. A determination must be made whether you are an "independent contractor" or an "employee". Go to irs.gov and search for the explanation of the two.

As an employee, yes, you will save money if you are switched from being an independent contractor to an employee. Independent contractors pay 15.3%
of Social Security for every dollar earned up to a threshold that changes every year, whereas an employee, through tax withholding is only charged 7.65% for every dollar earned (the employer is also charged 7.65%).

But you, yourself, cannot make a determination whether you are an independent contractor or an employee, unless, you have the authority to make those kinds of financial decisions of the business. It is entirely up to the maker of your checks to make that decision.

Answer 4

Home ownership and corresponding itemized deductions do not reduce your self employment tax with the exception of home office. If you are eligible to claim home office, then calculate the ratio of home office space to total space in the home. Then multiply this ratio times mortgage interest and property tax to get a self employment deduction and thus save self employment tax. The remaining portion of mortgage interest and property tax can still be itemized on schedule A. Do NOT claim the full amount on Schedule A. While calculating the home office expenses remember to multiply the ratio of space to utility costs, repairs, homeowners insurance, miscellaneous home expenses, and home depreciation

Answer 5

No, itemized deductions do not reduce the SE tax. The SE tax is assessed on the net profit from the business activity as reported on Schedule C or C-EZ. It's a separate calculation from the income tax.