Self-Employment Tax Strategies for Construction Business Owners
- Cost Construction Accounting
- Dec 9, 2025
- 6 min read
Construction business owners at $5M-$10M in revenue face a hidden profit drain that has nothing to do with material costs, labor shortages, or project delays. It's self-employment tax and most contractors are paying far more than necessary.
Self-employment tax hits sole proprietors and LLC members at 15.3% on all net business income. On $200,000 in net profit, you're paying over $30,000 in self-employment tax alone before income tax even enters the picture. Every dollar unnecessarily paid to the IRS is a dollar you can't invest in equipment, growth, or your next big project.
Legal strategies exist to cut your self-employment tax burden by $20,000 to $50,000 annually. This article reveals three essential approaches that successful construction business owners use: optimizing business structure, maximizing equipment deductions, and sheltering income through retirement plans.
Choose the Right Business Structure
Why Sole Proprietors Overpay
If you're operating as a sole proprietor or standard LLC, you're paying self-employment tax on every dollar of net profit. Made $200,000 after expenses? The IRS takes 15.3% over $30,000. This structure made sense when you were starting out. At $5 million in revenue with substantial net income, this approach becomes expensive.
The S-Corporation Advantage
An S-Corporation changes the game. Instead of paying self-employment tax on all profits, you split your income into two categories: reasonable salary (subject to self-employment tax) and distributions (not subject to self-employment tax).
Here's how it works. You pay yourself a reasonable salary through payroll, let's say $120,000 for a construction business owner managing a $7 million operation. This salary is subject to payroll taxes. The remaining $80,000 in profit comes to you as distributions, which avoid the 15.3% self-employment tax entirely.
The savings are immediate. On that $80,000 in distributions, you save approximately $12,240 in self-employment taxes annually. Over five years, that's over $61,000 staying in your business instead of going to the IRS.
Setting Your Salary: The IRS Test
The critical question: what's "reasonable" salary? The IRS requires S-Corporation owners to pay themselves compensation that reflects what similar positions earn in the market. For construction business owners, industry data shows median salaries ranging from $100,000 to $150,000 depending on company size and region.
Pay yourself too little and the IRS may reclassify distributions as salary, hitting you with penalties. The sweet spot: document your decision with industry salary surveys and advisor recommendations.
Construction-Specific Timing
Construction cash flow is lumpy. You might complete three major projects in Q4 and have minimal revenue in Q1. The S-Corporation structure gives you flexibility. Pay yourself consistent salary throughout the year for payroll compliance. Then take distributions when project payments hit your account without triggering additional self-employment taxes on those lump sums.
Maximize Equipment & Vehicle Deductions
The Equipment Tax Break You Can't Ignore
Construction is capital-intensive. Excavators, loaders, trucks, trailers the equipment list is long and expensive. The tax code offers two powerful tools: Section 179 expensing and bonus depreciation.
Section 179 allows you to deduct the full purchase price of qualifying equipment in the year you buy it, up to $1.22 million in 2025. Bonus depreciation lets you write off 60% of remaining costs immediately.
Here's a real example. You purchase a $500,000 excavator in 2025. Under Section 179, you can deduct the entire $500,000 from your taxable income this year. That deduction reduces your self-employment tax by approximately $76,500 (15.3% of $500,000). Add income tax savings at a 24% federal bracket, and your total tax reduction is about $196,500. The excavator effectively costs you $303,500 after tax benefits a 39% discount.
Without these strategies, you'd depreciate that excavator over five to seven years, spreading the tax benefit and losing the immediate cash flow advantage.
Vehicle Deductions: Two Paths to Savings
Most construction business owners drive trucks. The IRS gives you two ways to deduct vehicle expenses: standard mileage rate or actual expenses.
The standard mileage rate for 2025 is approximately 67 cents per mile. If you drive 20,000 business miles annually, that's a $13,400 deduction.
The actual expense method lets you deduct real costs: fuel, maintenance, insurance, and depreciation. For heavy-duty trucks costing $60,000 to $80,000, Section 179 expensing can apply here too, potentially creating a much larger first-year deduction.
A $75,000 F-350 used 80% for business might generate $50,000+ in first-year deductions through actual expenses and Section 179, compared to perhaps $10,000 using standard mileage.
Why Job Cost Tracking Protects Your Deductions
The IRS can audit equipment and vehicle deductions. Your protection? Clean job costing records that prove business use. When you track every piece of equipment to specific jobs and projects, you create an audit trail showing business purpose.
Without this documentation, aggressive deductions become audit risks. With proper job costing through QuickBooks or Sage 100 Contractor integrated with field tracking tools your deductions are defensible and IRS-compliant.
Shelter Income with Retirement Plans
Building Wealth While Cutting Taxes
Retirement plans aren't just about future security, they're immediate tax reduction tools. Contributions to qualified plans reduce your current self-employment tax burden while building long-term wealth.
For construction business owners, two plans stand out: the SEP-IRA and the Solo 401(k). Both allow substantial contributions that come directly off your taxable income.
SEP-IRA: Simple and Powerful
The SEP-IRA lets you contribute up to 25% of your net self-employment income, with a maximum of $69,000 in 2025. Setup is straightforward, administrative requirements are minimal, and you can vary contributions year to year based on cash flow.
Here's the math for a construction business owner with $250,000 in net income. You can contribute approximately $46,000 to a SEP-IRA. That contribution reduces self-employment tax by approximately $7,038 and reduces income tax by approximately $11,040 (assuming 24% bracket). Total immediate tax savings: $18,078.
Your $46,000 contribution effectively costs you $27,922 after tax benefits a 39% government subsidy on your retirement savings.
Solo 401(k): Maximum Flexibility
If you have no employees (or only your spouse), the Solo 401(k) offers even more power. You can contribute both as employer and employee, potentially reaching the $69,000 maximum more easily. Plus, you can make catch-up contributions after age 50.
For construction owners with highly variable income, the Solo 401(k)'s flexibility is valuable. Big year with $400,000 in profit? Max out contributions at $69,000. Slower year with $150,000? Contribute what makes sense. No minimum contribution requirements.
The Health Insurance Deduction
Self-employed health insurance premiums are 100% deductible. For construction business owners paying $15,000 to $25,000 annually for family health coverage, this deduction saves approximately $2,295 to $3,825 in self-employment tax alone, plus additional income tax savings.
This deduction is often overlooked because it doesn't appear on Schedule C with other business expenses making it easy to miss if you're not working with a construction-focused tax advisor.
Timing Contributions Around Cash Flow
Construction cash flow is unpredictable. Major project completions might hit in November and December. SEP-IRA contributions can be made up until your tax filing deadline (including extensions), giving you until October 15 of the following year to decide contribution amounts. This flexibility lets you see the full year's financial picture before committing funds.
This strategic timing turns retirement contributions from a "nice to have" into a powerful tax management tool that adapts to your business reality.
Stop Leaving Money on the Table
These three strategies optimizing your business structure, maximizing equipment deductions, and sheltering income through retirement plans work together to create a comprehensive self-employment tax reduction system. Construction business owners who implement all three can realistically save $20,000 to $50,000 annually compared to someone operating as a sole proprietor with basic tax filing.
That's cash staying in your business to fund equipment purchases, hire key project managers, or build the cash reserves that let you confidently bid larger projects. Five years of $35,000 in annual tax savings equals $175,000. Ten years equals $350,000. That's real money funding business expansion and building generational wealth.
How much are you leaving on the table in avoidable self-employment taxes?
Construction Cost Accounting offers a complimentary tax assessment specifically designed for construction business owners. With over 15 years of experience and CFMA membership, we'll analyze your current situation and identify opportunities you're missing.
Your complimentary assessment includes:
Business entity structure review and S-Corporation analysis
Equipment depreciation optimization using Section 179 and bonus depreciation
Custom retirement plan recommendations based on your income and goals
Don't wait to act. Contact a CCA specialist to schedule your free consultation today to speak with a construction tax expert who understands your business.
The IRS isn't going to tell you how to pay less. We will.
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