## Exclusions for Employees and Employers
**Excluded Income for Employees**
* Wages and salaries subject to withholding tax
* Tips and gratuities up to a certain amount
* Fringe benefits, such as health insurance premiums
* Non-cash compensation, such as meals or housing
**Excluded Income for Employers**
* Payments to employees for services
* Payments to retirement plans
* Contributions to health and welfare plans
* Amounts paid for wages, salaries, and tips
**Table of Excluded Income**
| Income Type | For Employees | For Employers |
|—|—|—|
| Wages and Salaries | Yes | No |
| Tips and Gratuities | Yes (up to a limit) | No |
| Fringe Benefits | Yes | No |
| Non-Cash Compensation | Yes | No |
| Payments to Employees | No | Yes |
| Retirement Plan Contributions | No | Yes |
| Health and Welfare Premiums | No | Yes |
| Payments Made for Wages, Salaries, and Tips | No | Yes |
Retirement Account Contributions
Contributions made to retirement accounts, such as IRAs and 401(k)s, are generally exempt from self-employment tax. This exemption applies to both employee and employer contributions.
The following table summarizes the retirement account contribution limits for 2023:
| Account Type | Contribution Limit |
|---|---|
| Traditional IRA | $6,500 (plus $1,000 catch-up contribution for individuals age 50 or older) |
| Roth IRA | $6,500 (plus $1,000 catch-up contribution for individuals age 50 or older) |
| 401(k) | $22,500 (plus $7,500 catch-up contribution for individuals age 50 or older) |
| SEP IRA | 20% of net self-employment income, up to $66,000 |
| SIMPLE IRA | $15,500 (plus $3,500 catch-up contribution for individuals age 50 or older) |
Health Insurance Premiums
Self-employment tax is a social security tax that self-employed individuals must pay. However, certain types of income are exempt from self-employment tax, including:
- Health insurance premiums paid for the taxpayer, their spouse, and dependents
- Long-term care insurance premiums
- Disability insurance premiums
To be eligible for the health insurance premiums exemption, the premiums must be paid for a qualified health plan. A qualified health plan is a health insurance plan that meets certain requirements, such as providing essential health benefits and having a minimum coverage level.
The health insurance premiums exemption is available to both individuals and families. The amount of the exemption is the same regardless of the number of people covered by the plan.
| Tax Year | Maximum Exemption |
|---|---|
| 2023 | $1,178.16 per month |
| 2022 | $1,069.50 per month |
| 2021 | $1,045.83 per month |
The health insurance premiums exemption can save self-employed individuals a significant amount of money on their taxes. For example, a self-employed individual who pays $2,000 per month for health insurance premiums could save $1,178.16 per year in self-employment taxes.
Certain Business Expenses
Certain business expenses are deductible from self-employment income, reducing the amount subject to self-employment tax. These expenses include:
- Advertising and marketing costs
- Business travel expenses
- Car and truck expenses
- Depreciation on business assets
- Education expenses related to the business
- Employee wages and benefits
- Home office expenses
- Insurance premiums
- Legal and professional fees
- Office supplies
- Rent or lease payments
- Repairs and maintenance
- Utilities
It’s important to keep accurate records of all business expenses to maximize deductions and reduce self-employment tax liability.
Other Exempt Income
In addition to business expenses, other sources of income are also exempt from self-employment tax, such as:
| Income Source | Exempt Amount |
|---|---|
| Interest income | Up to $1,000 |
| Dividend income | Up to $1,000 |
| Rental income | Passive income from rental properties is not subject to self-employment tax |
| Capital gains | Long-term capital gains are taxed at a lower rate than ordinary income |
| Other investment income | Certain types of investment income, such as municipal bond interest, may be exempt from self-employment tax |
Well, there you have it, folks! A handy guide to the ins and outs of self-employment tax exemptions. Now you can keep a little more of that hard-earned dough in your pocket. Thanks for hanging out with me today. If you have any more burning tax questions, be sure to check back later or give your friendly neighborhood tax pro a holler. Take care, and happy tax-saving!