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How Small Business Owners in Albuquerque Can Avoid Self-Employment Tax

  • Jan 28
  • 3 min read

Running a small business in Albuquerque is exciting, but taxes can feel like a heavy burden. One tax that hits many business owners hard is the self-employment tax. This tax covers Social Security and Medicare, and it’s something you pay when you work for yourself instead of a company. In 2025, the rate is 15.3% of your net earnings—12.4% for Social Security (up to an income limit of $168,600) and 2.9% for Medicare (no limit). That can add up fast!


The good news? There are legal steps you can take to lower or even avoid this tax. Here’s a simple guide for Albuquerque small business owners to keep more of their hard-earned money.


Step 1: Switch to an S Corporation

One of the best ways to cut self-employment tax is to change your business structure. If you’re a sole proprietor or run a single-member LLC, you pay self-employment tax on all your business profits. But if you set up an S Corporation (S Corp), you can split your income into two parts: a salary and distributions.

  • Salary: You pay yourself a reasonable wage for the work you do. Self-employment tax applies to this part.

  • Distributions: The rest of your profits can come to you as distributions. These don’t face self-employment tax—just regular income tax.

For example, say your Albuquerque coffee shop makes $100,000 in profit. As a sole proprietor, you’d pay $15,300 in self-employment tax on the whole amount. As an S Corp, you might pay yourself a $40,000 salary (taxed at $6,120 for self-employment) and take $60,000 as distributions (no self-employment tax). That could save you over $9,000! Talk to a local accountant or lawyer to see if this works for you.


Step 2: Hire Yourself Through the Business

If you stay a sole proprietor or LLC, you’re stuck paying self-employment tax on all profits. But if you form a corporation—like an S Corp or C Corp—you can become an employee of your own business. Employees don’t pay self-employment tax; instead, the business pays half of the Social Security and Medicare taxes (7.65%), and you pay the other half through payroll. This doesn’t “avoid” the tax completely, but it can lower your personal tax burden and shift some responsibility to the business.


Handling payroll filings and withholdings can be a headache, even if you are the only employee. Consider using an online payroll service (typically available for single-employee businesses at $30 to $60 a month) if you are a professional with hourly income that exceeds this amount.


Step 3: Maximize Deductions

Lowering your taxable income reduces your self-employment tax. As a small business owner in Albuquerque, you can deduct everyday expenses like:

  • Rent for your shop or office.

  • Supplies, like computers or tools.

  • Mileage if you drive for business (track those trips to Sandia Peak!).

  • Health insurance premiums you pay for yourself.

The IRS says these deductions can cut your net earnings, which lowers your self-employment tax . Keep good records and use a tax app or accountant to catch every deduction. Less profit on paper means less tax.


Step 4: Plan Your Income

Self-employment tax only kicks in if you make over $400 in net earnings a year. If your business is small or seasonal—like selling crafts at the Albuquerque Balloon Fiesta—you could keep profits low one year by reinvesting in your business (buying equipment, for instance). This won’t work forever, but it’s a short-term way to dodge the tax while growing.


A Word of Caution

These steps can save money, but they come with rules. The IRS watches S Corps closely to make sure your salary isn’t too low. Plus, setting up a corporation costs time and money—think filing fees with the New Mexico Secretary of State, which start at $100 for an S Corp. Meet with a local tax pro in Albuquerque to pick the right plan for your business.


Wrap-Up

Self-employment tax doesn’t have to drain your wallet. By switching to an S Corp, hiring yourself, claiming deductions, or timing your income, you can keep more cash for your Albuquerque business. Taxes are tricky, but with a little help, you can make them work for you—not against you.


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