You can't entirely "avoid" self-employment tax (SE tax) but can legally reduce it by structuring your business as an S-corporation, paying yourself a reasonable salary, and taking the rest as distributions not subject to SE tax. Maximizing legitimate business deductions (home office, vehicle, supplies) also lowers your net earnings, reducing the tax base. Increasing retirement contributions (Solo 401(k), SEP-IRA) and deducting health insurance premiums also cut taxable income.
If you want to avoid a tax bill, check your withholding often and adjust it when your situation changes. Changes in your life, such as marriage, divorce, working a second job, running a side business, or receiving any other income without withholding can affect the amount of tax you owe.
If you have a fairly simple self-employment situation you might qualify for free tax preparation through VITA, AARP Tax-Aide, or Get Your Refund. You can't have any employees or subcontractors, you can't have a net loss, and your expenses have to be under $35k to get help.
The self-employed may pay more taxes than what an employer pays in FICA per employee. The reason is that self-employed individuals pay both the employer and employee portion of FICA tax. However, there are deductions that can help eligible self-employed people reduce their federal and state tax liabilities.
For a $70,000 income in Canada (using 2025 rates), you'll pay roughly $13,000 to $20,000 in total taxes (federal, provincial, CPP, EI), depending on your province, resulting in a take-home pay around $50,000-$59,000, with federal tax around 14.5% or 20.5% depending on the portion, plus provincial tax and deductions like CPP and EI.
Canada's 90% rule helps non-residents and recent immigrants claim full federal tax credits (like the Basic Personal Amount) if 90% or more of their net worldwide income for the relevant tax year is from Canadian sources; otherwise, credits are prorated (reduced) based on their Canadian residency period, ensuring fairness for those who weren't residents all year.
Here are a few mistakes small business owners should avoid:
As a self-employed individual, you pay both income tax and a 15.3% self-employment tax (Social Security & Medicare) on 92.35% of your net earnings (profit after business deductions), plus potential state income tax, requiring quarterly estimated tax payments to the IRS to avoid penalties, often setting aside 25-30% of income for taxes.
The IRS one-time forgiveness program, or first-time penalty abatement, is a good option if you received an IRS penalty and have a solid history of filing and paying taxes on time.
Self-employment tax deduction
If you file Form 1040, Individual Income Tax Return, or Form 1040-SR, U.S. Income Tax Return for Seniors, with Schedule C, Profit or Loss from Business, you may be eligible to claim the Earned Income Tax Credit (EITC).
A recent tax law ("One Big Beautiful Bill") introduced a new $6,000 bonus deduction for Americans aged 65 and older, available for tax years 2025-2028, reducing taxable income, not the tax itself, with income phase-outs starting at $75,000 MAGI for singles and $150,000 for joint filers. This deduction adds to existing standard deductions, provides up to $12,000 for couples, and requires a Social Security number and filing status other than Married Filing Separately.
You may have to pay more taxes
If you have a small business with only yourself as an employee, you have to pay both the employer and employee portion of social security taxes in addition to your income taxes. This usually results in you paying more tax than you would if you worked for another company.
Choose the Right Business Structure
Sole proprietors and single-member LLCs pay full self-employment tax on all profits. However, if your income exceeds a certain threshold, switching to an S Corporation (S-Corp) could significantly reduce your SE taxes.
Lost earnings due to accident or illness
If your business stops, it doesn't earn any money. Insurance companies call thisa break in earnings or interrupted productivity. These breaks are some of the greatest risks for the self-employed.
The five key mistakes to avoid in a TFSA are over-contributing (and re-depositing withdrawals in the same year), treating it like a basic savings account (missing out on investment growth), failing to track your room (relying solely on CRA data), improperly moving funds (withdrawing and redepositing instead of transferring), and investing in non-qualified assets or high-risk trades (like day trading or certain foreign stocks that incur withholding tax).
Each year, on January 1, your annual contribution room resets. The maximum contribution for 2026 is $7,000, the same as for 2025. If you over-contribute to your TFSA, you'll have to pay a tax equal to 1% per month on the excess amount.