Have you begun working from home? You’ll need to stay on top of things come tax time. Keep reading to learn how self employment tax deductions work.
Roughly 16 million people are self-employed full-time in America. Many more are self-employed part-time thanks to the explosion of the nation’s “gig economy.”
While being self-employed is great in that it enables you to make extra money and in many ways, steer your financial destiny, there are challenges that come with the territory, one of the biggest being taxes.
Self employment taxes are extremely nuanced so a deep dive into them is beyond the scope of this post. What we will be talking about are self employment tax deductions, what they are, and which could be the most valuable to your business.
Our hope is that by better understanding deductions, you can save money and continue down a path towards a fuller education on the subject of taxes.
To table set our discussion on deductions, let’s touch on what self employment taxes are.
Just as you would if you worked a job that used a W2 generator, you need to pay taxes when you pull in income as a self-employed individual. What sets self-employed taxes apart from standard taxes depends on what kind of self-employed individual you are.
For example, if you’re a contractor who drives for Uber, you’d declare the income you make as personal income and would pay standard taxes on it plus an additional 15.3% for social security and medicare. If you’re self-employed but run a business that’s registered as a corporation, your tax situation may look different.
Talk to a tax professional if you’d like to understand specific tax obligations that apply to your unique situation.
Tax deductions for self-employed people work the same as tax deductions for W2 workers. The big difference is that people working for themselves have access to a wider spread of deduction opportunities.
Most expenses associated with your business (meals, supplies, etc.) can be deducted from your income which enables you to pay less in taxes at the end of the year.
Deductions for individuals that are in business for themselves are plentiful. Whether or not you qualify for a particular deduction comes down to unique circumstances surrounding your business that you’ll need to talk to a tax professional to fully understand.
In general, though, the following can be deducted by almost all self-employed individuals and are consequently, worth your attention:
Do you run your business out of your house? If you do, you likely qualify for a home office expense.
The simple way to calculate a home office expense and receive your deduction is to measure the area you use to do your work. Once you know the square footage of your workspace, multiply that number by $5.00 to get your deduction amount.
Note that the IRS stipulates your workspace needs to be used solely for work to qualify.
Almost everybody uses the internet to help run their business. If your internet connection is used solely for business transactions or even partially, you’re likely entitled to write off your monthly bill as communication costs.
Non-exclusive business internet connections can be separated out meaning you can deduce what percentage of the time you’re online is devoted to business and can write-off just that amount.
Most people that are working for themselves don’t have any kind of employer-sponsored insurance. That means having to pay insurance premiums out of pocket.
While insurance premiums can become extraordinarily expensive, you can bring down their burden by listing health care premiums among your self employment tax deductions.
In addition to being able to write off your own healthcare costs, you can write off costs associated with providing employees with healthcare services if applicable.
Travel and business are two peas in a pod as most people at some point will need to hop in a car or on a plane to make a sale. While traveling can be costly, most expenses associated with your trip can be deducted. That includes airfare, gas, hotels and more.
Just keep good records of what you did during your travels. That way, you can prove you were on the road for business and not for pleasure.
Any educational products you invest in that can in some way benefit your business can be claimed as self employment tax deductions. This includes going back to school to get a degree, taking an online course in marketing, and anything in between.
It’s often said that the best investment a person can make is in themselves in the way of increasing their knowledge. Given that the government is willing to pick up a portion of your academic tab when you’re a business owner via tax deductions, that investment is even more attractive!
Several business owners fail to claim self employment tax deductions to the degree they’re entitled to. That lapse may cost them thousands.
Don’t leave money on the table come tax season and be sure to keep educating yourself on what tax benefits your business is entitled to. Then, talk to a qualified accountant that works with self-employed individuals. They can ensure nothing escapes your purview!