Can I deduct retirement plan contributions from my self-employment income?

Question

I'm self-employed. I pay self-employment tax on ( income - business deductions ) * 92.35%.

Can I make contributions to a retirement account that counts as a business deduction?

More details:

I'm deciding what kind of retirement account to open. I don't make much money, so my income tax bracket is low. But I pay SE tax, which is a lot. So whether to go Roth or not depends, I think, on whether a pre-tax account would allow me to shield money from SE taxes. Since my income is low, contribution limits are not a major concern.

Answer 1

Basically, no. You have retirement plan options and can either go with a Roth option, which won't change your current tax burden, or go with a traditional plan, which is tax deductible but won't change your business deductions or self-employment taxes. This article has an explanation of options for setting up SEP or Solo 401k plans. Key quote for all the pre-tax retirement plans:

Because pre-tax employer and employee contributions are deducted in the same way, neither one is more tax-efficient than the other.

The article goes on to say that if you were an S Corp or LLC that elected to be taxed as an S Corp, a Solo 401(k) plan would allow the business to make an employer contribution to your 401(k) and even then there's no tax advantage to the employer contribution. Conclusion for S-corps:

[Employer contributions] would reduce the amount of income from the S-corporation that would be passed through to you as the owner, thereby reducing your income tax. But, because this income is not subject to payroll taxes in the first place, these contributions will not reduce your payroll taxes.

Answer 2

You can deduct retirement contributions (above the line even), but not as a business expense. So you can't avoid the SE taxes, sorry.

Answer 3

I don’t think above answers actually answer the posters question. He is asking if it would reduce his self-employment tax burden, not asking if it is 100% tax free. self-employed people pay for the employer AND employee share of Social security and FICA. On top of that they also pay regular income taxes. I’m quoting an excellent summary below from Investopedia:

Does a SEP IRA Reduce Self-Employment Tax? If you are a self-employed person who contributes to a SEP-IRA, you will see a reduction in your self-employment tax as the contribution will lift business expenses, lowering net profit, and therefore reducing the self-employment tax and income tax.