Self-Employed people have the advantage of numerous tax break incentives that would not be extended to employees who are receiving wages or salaries. Generally, these incentives would be compromised of several of the following Self Employment Tax Deductions: car expenses, home office space, office supplies, insurance premiums, Self-Employment tax, Professional and legal fees and a portion of your cell phone and utility bills. This list is not all exclusive and there are numerous additional categories for deductions. The hypothesis behind offering these deductions is to help save money for small businesses and reduce their tax bill at the end of the year. For example, if at the end of the year you file your taxes and the tax bill equates to $7,500 and you have deductions of $4,000 then your left with an actual tax due amount of $3,500. The Self-Employed Tax Deductions just saved you thousands. If these deductions were not available, then the $4,000 would have been paid directly to the Internal Revenue Service. Most small businesses do not have the full amount of funds available to pay tax amounts due at the time of filing. This creates a problematic issue and could create a Form 1040, Individual Income Tax Return, liability. The reason it would be Form 1040 is because most Self -Employed businesses deduct their business expenses on a Schedule C. A schedule C is then attached to your Form 1040 return for income taxes. Improper management of funds within small businesses can result in a liability owed to the IRS. To avoid a tax liability from accruing, it is recommended that Self-employed individuals be well educated on the appropriate Self Employment tax deductions that can be claimed. By utilizing deductions that your small business qualifies for, you can reduce your entire adjusted gross income for the year and diminish the tax amount due. Below is a list of ordinary deductions:
- Mileage or Vehicle Expenses. When you operate your vehicle for qualified business purposes, several of the expenses associated with the vehicle will become tax deductible. To determine what your deduction for the vehicle would be you have the option to use two different methods. You can use the standard mileage rate, which is a set rate determined by the Internal Revenue Service. This is the most convenient method to utilize because it will only require you to retain a minimal quantity of documents or receipts. The calculation is a straightforward input of how many miles driven and the dates in which you drove them. In 2019, the Standard mileage rate is 58 cents per mile. If you believe your vehicle expenses are greater than the calculation result of the Standard Mileage Rate, then your second alternative would be to utilize actual expenses. When choosing this method make sure that you have impeccable record keeping. You will determine the percentage towards driving that your vehicle was used for business purposes all year. Additionally, the expenses related to the gas, registration, repairs, oil changes and car insurance would be calculated into the final expense number. Once you determine what the percentage of time that the vehicle is used for business then you can determine how much of the total expenses can be written off as the actual expense method for your vehicle.
- Retirement Savings In 2020, the retirement contribution limit was increased to $19,500. This is a very advantageous deduction to take if you are self-employed. This deduction is quite large and can reduce your tax bill drastically at the end of the year as well as help prepare you for retirement tax advantages later in life. Qualified contributions to 401(k)s and IRA’s whether SIMPLE or SEP can be used for the deduction.
- Advertising In order to gain clientele each and every business encounter numerous avenues in which advertising takes place. This can include flyers, billboards, Facebook ads, merchandise, google, business cards and clothing just to name a few. These types of advertising expenses for your business would be considered tax deductible.
- Continuing Education If your Self-Employed business requires that you obtain or maintain a license or certificate then it will be a tax deduction. The Education Expenses would have to be directly related to “maintain or improving your skills for your existing business.” If you are taking education classes to learn a new trade or busines they would not qualify as a tax deduction.
- Business Travel and Meals Business travel becomes a deduction when you have a specialized business plan before the trip is made. While on this travel excursion you must be engaging in business activity. This could include finding or meeting new customers or attending a seminar or gathering to learn new skills for your current business. If you are engaging in any personal travel alongside the business travel all of the time spent and funds dispersed over the trip will have to be separated accordingly. You cannot include any personal expenses in this deduction. The IRS usually questions the use of this deduction so you will want to make sure your records are accurate. Travel expenses for the business are 100% deductible however meals are limited to 50%.
- Self-Employment Taxes Self Employment tax is the social security and Medicare taxes. When you are an employee for a company you pay this tax at a rate of 7.65%. This is because there is an employer portion that must be submitted also. When you are self employed this tax is paid at the rate of 15.3%. That is because you are both the employer and the employee. Being your own boss can have its downfalls, but the bright side is that half of your self-employment taxes can be deducted from your net earnings.
- Home Office Expenses and Office Supplies In order for your home office to qualify as a deduction you must have an isolated place used exclusively for business. You cannot utilize your workspace in a common area of your home. If you deduct the home office space then you can additionally deduct a portion of your household expenses such as real estate taxes, utilities, and mortgage interest. If you use the simplified deduction then the calculation is $5 per square foot, up to 300 square feet.
- Insurance Premiums Insurance premiums for individuals who are self employed can be deducted if it is for health, visions or dental purposes. Business insurance premiums for liability or malpractice can also be deducted.
- Phone and Internet Costs Phone and internet costs can be deducted as a business expense if it is used primarily for that reason, business. You are not allowed to claim any personal expenses related to the phone or internet. For example, if you own one cell phone and use it for both personal and business reasons then you have to determine the percentage of use for business and that is what will be allowed as part of the deduction.
- Credit Card and Loan Interest If you possess a business credit card or a loan that was used for business purposes and have paid interest on it during the year, it can be a deductible expense.
This directory of deductions can become increasingly complex than it seems in this passage. This editorial is designed to deliver you a basic understanding of several of the most commonly used deductions. There are a handful of additional deductions that can be found on http://www.IRS.gov also. When the IRS is overlooking your income tax returns and it includes self-employment deductions they will question whether the expense listed was an ordinary or necessary expense for the business description. If you are not sure whether expenses you have may qualify for a deduction is it best to seek professional help from a tax resolution firm who are trained and qualified to help assist in determining with you for any and all Self-Employment Tax Deductions.