Self Employment Tax Deductions (Some Might Surprise You)
A definitive list of self employment tax deductions that you should definitely know about.
Are you self employed and wondering how to maximize your take home income? Did you know that there are many self employment tax deductions, which when used properly increase your take home income. Continue reading and we will share with you all of the tax write offs that you should consider, some that are possibly new to you. This post also contains links to various resources on many of the items, in addition to resources directly from the IRS. Therefore, feel free to scroll down directly to the section that interests you.
What is a self employment tax deduction?
A self employment tax deduction is also known as a tax write off, or just tax deduction. Self employment tax deductions are dollar amounts you deduct from your gross income on your individual tax return or a business tax return. For the purposes of this article our focus is on the tax write offs for self employed individuals.
An example of an individual tax write off is when an individual spends money on a business expense. After, they then deduct that amount from their gross taxable income. This reduces the total dollar amount of income the individual pays taxes on. Therefore, reducing their total taxable income. Thus, potentially increasing the amount of their income tax return. For example, let’s say an individuals self employed gross taxable income is $10,000 USD. And they spent a total of $4000 USD on self employed tax deductible expenses. After taking into account the $4000 in self employed tax deductible business expenses the total remaining self employed taxable income for this individual is $6000. This means the self employed individual pays tax on $6000 of net income, instead of their $10,000 gross income.
Now you’re probably wondering what are the different tax deductions that you can take as a self employed individual? Continue reading this article are we will show you.
Home Office Expenses
As a self employed individual you can write off from your gross taxable self employment income the percentage of your rent or mortgage for the that part of your home, or apartment that is dedicated to your home office. For example, if your home office occupies 10% of your home, you can deduct 10% of your rent or mortgage from your self employment taxable income.
In addition, (for home owners) you can deduct mortgage interest, property taxes, home depreciation, homeowners insurance, utilities, and maintenance. The same logic for the percentage calculations to determine the tax write offs for self employed amounts applies as given in the example in the paragraph above.
Check out this article about how to work from home better, 7 Work from Home Tips, the Results Save You Money.
For the self employed there are those that work from home and those that rent office space. As we mentioned in the Home Office Expenses section, if you’re self employed and you work from home then you can deduct the percentage of your home that you use for your office from your taxable income. On the other hand, the rent expense of an office space you rent that is not a part of your home is a self employment tax deduction. The amount of your office rent is tax deductible from your taxable income.
Health Insurance Premiums
Deduct your health insurance premiums from your taxable income if you are self employed. Given the rising costs of health care, and the growing need for health care during the coronavirus pandemic, this self employment tax deduction cannot be missed.
Car Use for Business Purposes
Qualified business use of your car is tax deductible. What qualifies are business use of your car? Business mileage that is tax deductilbe falls into various different categories such as,
- travel to different offices
- drives to meet clients
- drivers to the airport or train station
- errands (i.e. bank, office supplies)
- temporary work locations
- odd jobs
For a complete detailed overview of qualified tax deductible mileage check out the following article, What Business Mileage is Tax Deductible.
If you qualify for business use car tax deductions, the next step is to choose your method of tax deduction. For business use car tax deductions there are two methods to choose from,
- Actual Car Expense Method
This is an itemized method of itemized each individual car expense that you incur throughout the year.
- Standard Mileage Rate
This is a per mile rate set by the IRS each year. For this years rates check out this post, IRS Standard Mileage Rates.
Falcon Expenses offers various mileage expense tracking software solutions. Check out this post for details about how to keep an IRS compliant odometer log, How to Keep an Odometer Log.
Self Employment Tax
Self employment tax includes the employer portion of Medicare and Social Security taxes. The IRS treats the ’employer’ portion of your self employment tax as a business tax. If you’re self employed you’re paying this portion of the tax yourself and it’s thus a self employment tax deduction.
Check out the following article about self employment tax, What is Self Employment Tax?
Meals when you’re traveling or entertaining clients are tax deductible. In addition, you can only deduct 50% of the total meal expenses from your self employed taxable income. This is an important self employment tax deduction that should not be overlooked. It is often challenging to diligently track tax deductible meal expenses for the self employed. Therefore, we recommend using a convenient expense tracking app such as Falcon Expenses. Falcon Expenses automates the process of keeping track of expenses. For example, integrate your debit and credit card charges into Falcon Expenses. Then quickly categorize self employed tax write offs such as meal expenses with a the few taps of your finger.
Travel expenses include expenses you incur while traveling for business purposes. Please note that to be a travel expenses is a tax write off for self employed if the business travel lasted longer than an ordinary days work. This means that the To be considered a business trip your travel must have a purpose that is related to your business activity and planned before. For example, meetings with clients, business development, For example, lodging, meals, entertainment, etc. Read the following article for a detailed IRS definition of business travel, What is the Definition of Business Travel?
Business travel expenses include travel, lodging, meals, entertainment, etc. In this article we have described most of these self employed tax deductions for business travel aside from lodging and travel. For lodging and travel you can deduct the full amount of the expense. Travel includes travel made by train, plane, bus or car. For travel by personal car you deduct a certain amount per mile, or you use an itemized expense deduction method. Review the following article for more information on self employed tax deductions for business travel with use of your personal car, <insert article link here>.
Please review the following article for a detailed overview of business travel expense deductions for self employed, IRS Rules for Recording Business Expenses for Travel, Transportation, Meals and Entertainment.
Entertainment expenses are expenses associated with the entertainment of clients, vendors, partners, etc. For example, taking a client out to dinner or to a show. Other expenses such as cabd, meals, etc, that are associated with the entertainment activity are part of the entertainment expense. Keep adequate records of these expenses are tax deductible. Check out this article for adequate record keeping of self employment deductible entertainment expenses, Adequate Record Keeping for Tax Deductible Entertainment Expenses.
The costs for courses, classes, seminars or any other form of education used to maintain or expand your skills to do your work are tax deductible. However, costs for learning new skills not in your current field of work are not tax deductible.
The amount you spend on business insurance is self employment tax deduction.
Do you pay for ads to attract customers? The money that you spend on advertisements are self employment tax deductions. Further, money you spend on advertisements to raise money for charity using your self employment brand are also tax deductible.
Retirement Plan Contributions
Contributions you make to your retirement plan are self employment tax deductions. For example, 401(k) and IRA contributions.
Interest on bank business loans is a self employment tax deduction. In addition the interest incurred on credit cards for business purchase is also a self employment tax deduction.
About Falcon Expenses
Falcon Expenses is an iOS solution for expense tracking and management. Scan receipts, we type merchant, date and amount. Auto-track mileage expenses via GPS and log billable hours with an integrated timer. Quickly organize expenses by time period, project or client and easily prepare reports for email to anyone in PDF or spreadsheet formats, all from your phone. Use for reimbursements, taxes, record keeping or invoicing. Falcon Expenses is great for professionals, freelancers, realtors, business travelers, truckers and more. Find out more, here.
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