Self-Employment Tax Deductions
18 Overlooked Tax Credits for the Self-Employed
When it comes to filing your taxes: your employment status matters. Particularly, if you qualify as self-employed…
Let’s face it. 2020 has been an extremely challenging year for many. With millions of Americans facing layoffs due to recent events, many find themselves in a novel position: taking on subcontractor or gig work to make ends meet.
If you are new to being self-employed, know that taxes are different than when you held a job at a business or corporation. You’ll need to learn about the taxes you owe and what you can deduct to ease your tax burden. Luckily, there are several tax breaks available to the self-employed.
First, let’s investigate how self-employment taxes are different than standard employee taxes.
The Self-Employment Tax
Being your own boss definitely has plenty of added perks. But, unfortunately, you’ll have to pay some extra taxes.
When working for someone else, your employer usually pays a portion of your Social Security and Medicare taxes. As of 2019, employees pay 7.65% toward these costs from their paychecks. Of course, when you are self-employed, no one is helping you cover these taxes. You are responsible for paying the full 15.30% of your earnings.
But, there’s still some good news…
You can deduct half of your self-employment tax from your net income. The “employer” portion of the taxes you paid can be written off as a business expense.
Moreover, there are a lot of other expenses you can deduct when tax time comes around. Let’s take a look at additional, popular tax credits for the self-employed, organized by category.
Every business needs room to operate. Even if you are hunkered down in an extra room in your home, you may qualify for deductions.
Self-employed and working from home? Then, some of your home expenses—mortgage (or rent), property taxes, utilities, and repairs—may be deductible. You need to calculate the percentage of your home’s square footage that you use regularly and exclusively for work. That percentage then becomes a deductible expense.
A simpler option is deducting $5 per square foot of your home that you use exclusively for business. This can’t be more than 300 square feet. So if you have a home office that’s 10 x 12, you can deduct approximately $600. Choosing this option, however, may not get you the full deduction to which you’re entitled.
Rented Office/Warehouse Space
Working from home not working out? If you rent office space—nothing you own even partially—you can deduct these expenses.
Similarly, if you need to store a product you’re selling, you can consider the rent you pay for storage as a deductible expense.
Your Phone & Internet
How are you staying connected? These days there are a lot more virtual interactions going on. Your business phone, fax, and internet expenses are deductible.
But it could get a little tricky. Say you have only one phone for personal and business use. You can only deduct a portion (the percentage you use for business) of the bill. The same goes for the internet. Of course, if you have separate phone and internet accounts for your business, those are 100% deductible.
Some self-employed businesses may only need specific equipment for a short time. Say you need to rent a box truck to deliver a larger than normal order. The rental costs of equipment may be tax-deductible.
While business travel has decreased dramatically this year, it is still essential for some types of businesses. Here are some ways you can deduct travel expenses.
Does your self-employment involve driving to meet clients, vendors, or prospects? Or maybe delivering a product? Keep a mileage log of every trip related to your self-employment. When it is time to do your taxes, add up the miles you logged. The IRS standard mileage rate for 2020 is 57.5 cents per mile.
For example, if you drove 475 miles for your business in 2020, then you can claim a deduction of a little more than $273.
Be aware that there are different sets of rules if your business has more than five cars or when you’re leasing a vehicle.
Go out of town for business often? For your travel to be considered a business expense, it needs to meet the requirements:
- Travel lasts longer than an ordinary workday
- You have to sleep or rest away from your home city
- There is a specific business purpose planned before leaving
Be sure to keep records and receipts of your business travel expenses and activities.
If your travel is considered legitimate business, you can often deduct:
- Cost of transportation to and from your destination (e.g. airfare)
- Transportation while at your destination (e.g. car rental)
- Meals (more on this next…)
Oh, and if you have a trip planned to the Caribbean and plan to tell the bartender at your resort about your business, that’s definitely NOT going to fly as business travel. Major bummer, we know…
Meals While Traveling/Meeting Clients
Meet your clients over lunch? Out-of-town and looking for a quick dinner? These meals are a tax-deductible business expense. This doesn’t mean you should be splurging on lobster and steaks every time you’re spending a night out of town. Reasonable meals—given the circumstances—are less likely to get scrutinized if you’re audited.
Keep your receipts and you can deduct 50% of a meal’s cost. You can also choose to get a 50% standard meal allowance if you don’t have the receipts but keep a record of the place, time, and purpose for your travel.
Oh, and that sandwich you wolfed down at your desk yesterday… That doesn’t qualify as a meal expense. We wish it did!
Medical and Retirement Expenses
If you’re self-employed, you don’t receive the same benefits as working for a corporation or business. Fortunately, the government allows you to deduct some of these necessary benefits when paying for them yourself.
Health Insurance Premiums
Self-employed and paying for your own health insurance? If you’re not eligible to participate in a plan through your spouse’s employer, these costs are deductible. This includes expenses related to health, dental, and qualified long-term insurance premiums.
One advantage of working with big companies is receiving that 401(k) plan with matching contributions. If you are self-employed by choice or necessity, you won’t get this option to help save for your retirement.
All is not lost.
There are actually solo 401(k) plans available. As you may know, your contributions to 401(k) plans are pre-tax. This means you can deduct this expense when tax time comes. Of course, once you start drawing from your 401(k)—at age 59 ½ or older—those distributions are taxed.
As of 2020, your solo 401(k) contributions can be up to $57,000 or 100% of your earned income—whichever is less. If you are 50 or older, that number jumps to $64,500.
Of course, there are other options for retirement savings like IRAs or Roth IRAs. You could learn more about securing funds for your retirement by talking to a financial advisor.
Staying Informed and Relevant
We are in an unprecedented time when the entire business environment is in flux. Being self-employed, you may need to access resources to stay current and relevant. In fact, obtaining education and information related to your business may be tax-deductible.
You can deduct education expenses when they relate to your CURRENT business. For your web page development business, a course about new coding techniques is deductible. But if you are learning about a new line of work—like becoming a real estate agent—those courses aren’t deductible as a self-employment expense.
If you are pursuing education to change careers, however, you may want to consider deductions like the Lifelong Learning tax credit or even the American Opportunity Tax Credit.
Publications and Subscriptions
Are there some great books, trade magazines, or journals related to your business? Purchasing these publications is a deductible expense. Like other education expenses, they must be directly related to your business. For example, a subscription to Rolling Stone magazine won’t qualify for your executive consulting business.
Other Deductions to Consider
Depending on your self-employed business, there are other deductions you should consider. Here are some of the more popular ones:
Business Start-Up Costs & Operating Expenses
Getting your business up and running usually requires an investment of time and money. While you may not get your time back, the costs of starting your business can be deductible.
These deductions can fall into different categories:
- Capital Expenses: Large expenses (purchased assets) for your business—like vehicles or equipment—useful for more than one year. These purchases may not be completely deductible for the year purchased. They are depreciated (gradually deducted) over time.
- Operating Expenses: Assets expected to be purchased and used in the same fiscal year—like office supplies and wages—can be fully deducted in the year they occur.
- Startup Costs: Costs related to planning and setting up your business—such as market research and attorney fees—can be deductible up to $5,000. If you set up a corporation or LLC, you can double that number to help ease the burden of legal, consulting, and state filing fees.
Spending money to get the word out about your business? You can deduct reasonable advertising expenses directly related to your business activities. This can include purchasing advertising space, promotions that lead to more business in the future, and marketing expenses.
Legal and Professional Fees
Using an accountant or attorney to help your business? Ordinary and necessary professional fees directly related to operating your business are deductible. As you probably know by now, they have to be related to your business. If your attorney is also helping you with a will or personal injury claim, you can’t include these costs in your self-employment deductions.
Insurance is a necessary evil to keep your business running and protect you from a society that loves lawsuits. Hopefully, nothing major will go wrong with your business. Relying on pure luck, however, can be dangerous and (in some cases) illegal.
Expenses related to fire, credit, liability, and business vehicle insurance premiums can be deducted from your tax returns. So, even if you don’t make a claim this year, at least you are saving some money.
Want to know one benefit of paying your state and local taxes? You can deduct them from your federal tax return.
Better yet, the expense of paying a tax professional to prepare your business tax return is deductible.
And Yes…There’s More…
This list isn’t exhaustive by any means. There are more deductions based on your type of business and the expenses you incur while running it.
Got some time? Check out the Internal Revenue Service’s Publication 535.
Before doing that, cancel your appointments for the next couple of hours and pour some coffee. Be sure to have something to take notes on. Things can get pretty complicated.
…Or Make It Easier On Yourself
Do you really have the time to learn complicated tax codes while still making sure your business stays afloat?
Want to miss out on money you could have because you overlooked an important self-employed tax deduction?
Didn’t think so.
Why not let the professionals handle it?
At Steven Lissner & Company, OUR BUSINESS is understanding and using the tax laws to help YOUR BUSINESS save money. Our experienced certified public accountants understand how hard the self-employed work to maintain their livelihood. We work with you to find every possible deduction so you can keep more of what you earn.
Don’t lose out on the money you deserve. And PLEASE don’t risk an audit and expensive penalties by making incorrect deductions.
You run your business. We’ll make sure your taxes are filed correctly. And, as you’ve learned from this article, these services are tax-deductible.
Let’s get started saving you more money today. Give us a call at (973) 917-4080.