Why doesn't the HSA contribution offset the SEP tax?

[cynthiaramseynol]

It seems there is no benefit to contribute to the HSA account as my amount owed to the IRS is based on the SEP tax.  Need confirmation.  Is there a better way to reduce the SEP #?

[BMcCalpin · Accepted solution]

The HSA contribution (whether through your employer or directly to the HSA custodian) reduces your federal taxable income. But, as you see, the Self-employment tax is calculated separately from your other income and is added to your tax due in Schedule 2.

This is consistent with how an employee is taxed. An employee pays 7.65% in Social Security and Medicare taxes (which is what the SE tax is), no matter what the employee's taxable income is. The analogy is that the self-employed pays SE taxes on the net profit of the Schedule C, not on the employee's adjusted gross income (where direct HSA contributions appear). Of course, the employer pays the other 7.65% of the Social Security and Medicare taxes.

Unfortunately, your HSA contribution does not reduce your net profit from self-employment, so it does not affect the amount of self-employment taxes you must pay.

The only way to reduce your SE tax is to reduce your Schedule C net profit.

[Edited 4/2/2020 10:57 am CDT - updated for 2019]