Did you know that you can claim 50% of what you pay in self-employment tax as an income tax deduction?
Self-employment can be a difficult method to make a living due to long hours and variable revenue. Another layer of complexity is having to record your business income and expenses.
Whether you opt to file a return on your own or engage an expert to assist you, knowing the basics of what costs you can deduct is critical.
Self-employed tax deductions swoop in and cut your tax bill, saving your pocketbook from approaching catastrophe.
However, you must first understand what expenses are deductible if you work from home before you can take advantage of tax write-offs.
Throughout the years, legislators have added various lines to the tax code to help self-employed people cope with rising company expenditures.
Many of these modifications will be temporary, with the majority of them being phased out by 2025, but some will be permanent.
Tax Deductions will assist sole proprietorships, partnerships, S corporations, as well as certain trusts, estates, and limited liability companies (LLCs). Those that meet the requirements can deduct up to 20% of their QBI.
Table of contents
- Who can take advantage of these tax breaks?
- Self-Employment Tax Deductions
- Social Security and Medicare Tax Deductions
- Computer and tech equipment Tax Deductions
- How to Work Out the Deduction for a Home Office?
- Health Insurance Premiums Tax Deductions
- Publications and Subscriptions Tax Deductions
- Repairs and maintenance Tax Deductions
Who can take advantage of these Tax Deductions
If you're self-employed, you can take advantage of these tax breaks. Self-employment is defined by the IRS as carrying on a trade or business as a lone proprietor, independent contractor, single-member LLC, or partnership member.
Even if your firm isn't profitable, you're still deemed self-employed if you're doing something profit-driven (in other words, your goal is to make money eventually).
You don't have to work for yourself full-time either. You're still regarded as partially self-employed if you have a side hustle and part-time employment.
Eliminated or Changed Tax Deductions
It's important to keep in mind that tax laws are always changing, and these provisions could be altered or increased at any moment before 2025.
A review of the most common self-employed taxes and tax deductions is essential to keep you up to date on any necessary adjustments to your quarterly estimated tax payments.
Self-Employment Tax Deductions
The Medicare and Social Security taxes that self-employed people must pay are referred to as the self-employment tax. Small company owners, freelancers, and self-employed individuals are all included.
The 15.3 per cent self-employment tax includes 12.4 per cent for Social Security and 2.9 per cent for Medicare.
The self-employment tax is paid by both employers and employees. Each of them is accountable for 7.65% of the total.
Solely self-employed individuals are responsible for both. If your income exceeds a specific threshold, you will be subject to an additional 0.9 per cent Medicare tax rate.
The higher Medicare tax thresholds apply to your combined salary, compensation, and self-employment income, not just your self-employment income.
So, if you earn $100,000 from self-employment and your spouse earns $160,000 from a job, you'll have to pay an extra 0.9 per cent Medicare tax on the $10,000 that your joint income surpasses the $250,000 threshold.
Being your boss isn't fun when you have to pay more taxes. The good news is that you can deduct half of your self-employment tax from your net income when calculating your income tax, resulting in a lower self-employment tax bill.
The Internal Revenue Service (IRS) considers the employer portion of the self-employment tax to be a business expense, and you can deduct it as such.
Your employees not only assist you in running your business, but they also provide you with a valuable tax deduction. Wages, incentives, and the cost of your employees' benefits, such as health insurance and retirement contributions, can all be deducted.
Social Security and Medicare Tax Deductions
It's vital to understand that the self-employment tax refers to Social Security and Medicare taxes, which are equivalent to the FICA tax paid by an employer. When a taxpayer deducts one-half of his or her self-employment tax, it is just to calculate his or her income tax.
Remember that whether you work for yourself or someone else, you must pay the first 7.65 per cent of your income tax. When you work for someone else, you're indirectly paying the employer portion because it's money your boss can't afford to add to your income.
Based on their accounting technique, self-employed people calculate their net income from self-employment and deductions.
When calculating their net income from self-employment, most self-employed people utilise the cash method of accounting, which means they will include all money actually or constructively received during the period, as well as any deductions paid during the period.
Computer and tech equipment Tax Deductions
If you use a computer or other tech equipment for your business, you can deduct it. This includes everything from laptops and tablets to desktops and webcams.
Don't forget about the little things, like replacing your dog's chewed laptop charger or upgrading your mouse to a sleek new trackpad.
Home Office Tax Deductions
One of the more difficult deductions is the home office deduction. In summary, any workspace that you use regularly and exclusively for your business can be deducted as a home office expense, whether you rent or own it.
You're practically operating on trust, but in the case of an IRS audit, you should be prepared to defend your deduction.
If you need to provide this information to verify tax deductions that relies on your workplace's square footage, one way to do it is to draw a schematic of your workspace with precise measurements.
In addition to the office space itself, you can deduct the business percentage of deductible mortgage interest, house depreciation, utilities, homeowners insurance, and repairs that you pay throughout the year.
For example, if your home office takes up 15% of your living area, 15% of your monthly electricity bill is for tax deductions.
Some of these tax deductions, including mortgage interest and depreciation, are only accessible to persons who own rather than rent their home office premises.
How to Work Out the Deduction for a Home Office?
You can calculate your home office tax deductions in one of two ways: the traditional method or the simplified method, and you don't have to use the same method each year.
You must estimate your actual home office expenses and keep proper records in case of an audit to comply with the standard procedure.
The simplified option allows you to multiply the square footage of your home office by an IRS-set rate.
To qualify for the simple option, your home office must be smaller than 300 square feet, and you cannot deduct depreciation or home-related itemised deductions.
The simplified strategy is a clear choice if you're short on time or can't gather enough records of your deductible home office costs.
The highest you may deduct is $1,500.15 because the simpler option is computed at $5 per square foot with a maximum deduction of $1,500.15.
If you want to get the most out of your home office deduction, you should calculate it using both the traditional and simplified methods to discover which one provides the best results.
If you use the usual approach, calculate the deduction using IRS Form 8829, Expenses for Business Use of Your Home.
Dues and memberships Tax Deductions
Professional membership clubs are a terrific way to keep in touch with others while working from home. You can also deduct the dues you pay to be a member of a professional group.
Internet and Phone Bills Tax Deductions
Whether or not you claim the home office deduction, you can deduct the business part of your phone, fax, and Internet expenses.
The key is to deduct only those costs that are directly related to your business. You could, for example, deduct the costs of operating an Internet-connected business website.
If you only have one phone line, you shouldn't deduct the entire monthly price, including personal and commercial use.
Even if you have an office in your home, the cost of basic local telephone service (including any taxes) for the first telephone line you have in your home is not deductible, according to the IRS.
On the other hand, long-distance business calls or the cost of a second phone can be subtracted as a whole.
Auto expenses Tax Deductions
Even if you work from home, you must get out into the world to do your job. You can deduct your business driving and other costs related to the trip if you use your automobile for work.
The number of business miles driven is multiplied by a flat per-mile fee that varies from year to year. It was reduced from 57.5 cents per mile to 56 cents per mile for the tax year 2021.
Actual expense technique: This method allows you to deduct particular costs such as petrol, oil changes, tyres, registration fees, insurance, and depreciation related to operating your company car.
If you use your business vehicle for personal purposes as well, you'll need to figure out how much of the cost is deductible.
The strategy that will provide you with the most tax deductions is determined by your specific circumstances.
The real expense method may be preferable if you have a lot of charges to cover. However, if your vehicle's continuous operating costs are modest, the regular mileage rate may be preferred.
You can deduct the expenditures of business trips if you use your automobile for that purpose. Keep detailed records of the date, mileage, and purpose of each journey; don't try to claim personal car trips as work car trips.
You can figure out your deduction using either the IRS-mandated standard mileage rate or your actual expenses. In 2021, regular mileage charges will be 56 cents per mile and 58.5 cents per mile in 2022.
The standard mileage rate is the simplest to utilise because it necessitates the least amount of record-keeping and calculation. Simply keep track of how many business miles you drive and when you drive them.
Then multiply your annual business mileage total by the usual mileage rate.
To utilise the actual expense technique, you must figure out what percentage of your driving was for business throughout the year, as well as the complete cost of owning and operating your automobile.
It includes depreciation, gas, oil changes, registration fees, repairs, and insurance. Your deduction would be $300 if you spent $3,000 on car running expenses and utilised your car for business 10% of the time.If you want to use the regular mileage rate on a car that you own, you must do so during the first year that the vehicle is accessible for business usage. You might choose to use the normal mileage rate or real expenses in subsequent years.
If you're leasing a vehicle and want to use the normal mileage rate, you'll have to do it every year of the lease duration. It's important to calculate your tax deductions both ways, much like the home office tax deductions, so you may claim the larger amount.
Health Insurance Premiums Tax Deductions
If you are self-employed, pay for your health insurance, and are not eligible to join a plan via your spouse's employer, you can deduct all of your health, dental, and qualified long-term care (LTC) insurance premiums.
Even if they aren't deemed dependents on your taxes, you can deduct premiums paid for coverage for your spouse, dependents, and children under the age of 27 at the end of the year.
Use the Self-Employed Health Insurance Deduction Worksheet from IRS Publication 535 to figure out your deduction.
Postage and shipping Tax Deductions
You can deduct shipping and postage charges for any business mailings you send out, even if you don't package and ship products to customers.
Meals Tax Deductions
Lunch is a tax-deductible business expense when travelling for business, attending a business conference, or entertaining a client.
The meal cannot be expensive under the circumstances, and you can only deduct 50% of the actual cost of the meal if you keep your receipts, or 50% of the usual meal allowance if you keep records of the time, location, and business purpose of your trip but not your actual meal receipts.
As a result, the desk lunch is not deductible as a business expense. The deduction has been amended by the Consolidated Appropriations Act (CAA), 2021.
The law allows a 100 per cent business cost deduction for meals as long as the charge is for food or beverages served by a restaurant (rather than the current 50 per cent). This provision will expire at the end of 2022 and will apply to charges incurred after December 31, 2020.
The federal Meals and Incidental Expenses (M&IE) rate, which is modified every fiscal year, is the normal meal allowance.
The US General Services Administration (GSA) website has the current rate and M&IE split. It is not tax-deductible to eat lunch alone at your desk. Furthermore, before the TCJA, costs for meals and entertainment were integrated.
You may be allowed to deduct the separately stated costs as a meal expense if food is given during an entertainment event and the food was purchased separately, or the cost of the food and beverages was declared separately from the cost of the entertainment on one or more bills, invoices, or receipts.
The meals, on the other hand, cannot be deducted if they are not separately recognised on the receipt.
Furniture and decor Tax Deductions
Working in an empty environment isn't fun or practical no matter what you're doing. Furnishing and decorating your home office, offsite office, or other workspaces might be deducted.
Travel Tax Deductions
Business travel must continue longer than a regular workday, require you to sleep or rest, and take place outside of your tax home's general area to qualify as a tax deduction (usually, outside the city where your business is located).
To be deemed a business trip, you must have a clear business aim in mind before leaving home, and you must engage in business activities while on the road, such as discovering new customers, meeting with clients, or learning new skills directly connected to your firm.
Keep meticulous records and receipts for your business travel expenses and activities, as the IRS frequently scrutinises this deduction.
Transit to and from your trip, as well as transportation at your destination, housing, and meals, are all deductible travel costs.
You can't deduct expensive or exorbitant spending, but you don't have to go with the cheapest alternative.
But bear in mind that you, not your fellow taxpayers, will be paying the majority of your business travel expenses, so it's in your best interest to keep them low. Except for meals, which are only 50% deductible, your business travel expenses are deductible.
If your trip includes both work and pleasure, things get a little trickier; in a nutshell, you can only deduct expenses linked to the business portion of your trip.
If your spouse (who is not an employee of your company) joins you on a business trip, you can only deduct the percentage of your hotel and transportation costs that you would get if you travel alone. Remember that the business portion of your trip must be prepared ahead of time.
Merchant processing fees Tax Deductions
You're undoubtedly paying merchant processing costs if you accept credit cards. These are the 2–4% fees you pay your credit card processor to process your cards.
Payroll taxes and expenses Tax Deductions
If you employ people in your firm, you're well aware that payroll taxes may be a significant drain on your finances. Employer payroll taxes are deductible at the municipal, state, and federal levels.
You can also write off the expense of payroll software as well as workers' compensation insurance.
Interest Tax Deductions
Interest on a bank-issued business loan is a deductible business expense. If a loan is utilised for both business and personal reasons, the business component of the interest expense is allocated based on how the loan funds are used.
If the full loan is not used for business-related operations, you will need to track the disbursement of funds for other reasons. When you use your credit card for personal expenditures, the interest is not tax-deductible; but, when you use it for business transactions, the interest is.
However, it is always less expensive to spend only the money you currently have and avoid incurring any interest charges. Avoid borrowing money because a tax deductions only give you back a portion of your money, not all of it.
Borrowing, on the other hand, may be the only method for certain firms to get up and running, to stay afloat during sluggish periods, or to ramp up during busy periods.
Photography and videography equipment Tax Deductions
Investing in photography and videography equipment is a tax write-off as well as a way to get that Instagram-worthy snap of your goods.
Publications and Subscriptions Tax Deductions
Speciality periodicals, journals, and books that are directly linked to your business might be deducted as supplies and materials.
A daily newspaper, for example, would not be deemed a business expense because it is not detailed enough.
If you're a restaurant owner, a subscription to Nation's Restaurant News is tax-deductible, and Nathan Myhrvold's several-hundred-dollar Modernist Cuisine boxed set is a reasonable book buy for a self-employed, high-end personal chef.
Professional development Tax Deductions
In an ideal world, we would start our enterprises knowing everything we need to know to succeed. When you're self-employed, however, there's a lot to learn. That's where continuing education comes in.
Rent Tax Deductions
A person can deduct the amount they spend for rent if they rent the office. An individual can also deduct amounts paid for rented equipment. It's also deductible if you have to pay a charge to terminate a business lease.
However, you cannot deduct rental expenses on any property you own, even if it is partially owned. In addition, the rent must be affordable.
When you and the owner are connected, a reasonableness test is required, but rent is considered acceptable if it is the same amount you would pay to a stranger.
Education Tax Deductions
Any schooling costs you seek to write off must be relevant to keeping or upgrading your abilities for your current business. Classes to prepare for a new line of work are not tax-deductible.
If you're a real estate consultant, taking a course on Real Estate Investment Analysis to brush up on your abilities is deductible, but a lesson on how to teach yoga isn't.
Business Insurance Tax Deductions
Do you pay premiums for any form of business insurance, such as fire insurance, credit insurance, business vehicle insurance, or company liability insurance? If this is the case, you may be able to deduct your premiums.
Some people dislike paying insurance premiums because they believe they are a waste of money if they never need to use them. The tax deductions for company insurance can help to alleviate this aversion.
Telephone and internet Tax Deductions
You can deduct a percentage of your cell phone and home internet cost if you're self-employed. The tax deductions are calculated based on how much time you spend on your phone or computer for business versus personal use.
Startup Costs Tax Deductions
The IRS normally requires you to deduct big expenses as capital expenses over time rather than all at once. However, in the first year of active trade or business, you can deduct up to $5,000 in startup costs.
Market research and travel-related expenses for beginning your business, scoping out potential business locations, advertising, attorney fees, and accountant fees are all examples of tax-deductible startup charges.
If your overall startup costs surpass $50,000, your $5,000 tax deductions will be decreased. You can deduct up to $5,000 more in organisational expenditures, such as state filing fees and legal fees if you form a corporation or LLC for your business.
Even though they aren't initial costs, professional fees to consultants, attorneys, accountants, and others are deductible at any time.
Purchasing equipment or cars for a business isn't considered a beginning cost, but it might be depreciated or amortised as a capital expenditure.
Repairs and maintenance Tax Deductions
Keep in mind that the expenditures of maintaining your rented space are tax-deductible. You can deduct maintenance costs in a variety of ways, from painting your office to paying for regular cleaning.
What are the things that you need to keep in mind?
The term necessary refers to an expense that is both beneficial and appropriate for your company. The expense does not have to be critical to the operation of your company, but it must be valuable in some way.
Clothing that isn't protective (like a hard hat or work gloves), promotional (like a shirt with your brand emblazoned on it), or a costume isn't deductible. If it's appropriate to wear on the street, it's not deductible, according to the IRS.
For example, if you buy a suit to wear to a speaking engagement, the garment's cost is not deductible because it may be worn on the street. Yoga pants, dress shirts, work dresses, and apparel to wear on camera or in public are all examples of this.
Haircuts, cosmetics, and getting your nails done are all nondeductible expenses. Only if you have your hair styled for a photo or video session may you deduct your hair charges.
It's time to start keeping track of your spending now that you know the dos and don'ts of self-employed tax write-offs.
Make sure to keep track of all of your tax deductions so that when tax season rolls around, your write-offs can do what they're supposed to do: protect your company from hefty tax payments.
To manage your costs and expenses you can use much available online accounting software.
How can Deskera Help You?
Deskera Books is an online accounting, invoicing, and inventory management software that is designed to make your life easy. A one-stop solution, it caters to all your business needs from creating invoices, tracking expenses to viewing all your financial documents whenever you need them.
- Self-employment can be a difficult method to make a living due to long hours and variable revenue. Another layer of complexity is having to record your business income and expenses.
- You don't have to work for yourself full-time either. You're still regarded as partially self-employed if you have a side hustle and part-time employment.
- The Medicare and Social Security taxes that self-employed people must pay are referred to as the self-employment tax.
- If you need to provide this information to verify tax deductions that rely on your workplace's square footage, one way to do it is to draw a schematic of your workspace with precise measurements.
- Professional membership clubs are a terrific way to keep in touch with others while working from home. You can also deduct the dues you pay to be a member of a professional group.
- If you are self-employed, pay for your health insurance, and are not eligible to join a plan via your spouse's employer, you can deduct all of your health, dental, and qualified long-term care (LTC) insurance premiums.
- Working in an empty environment isn't fun or practical no matter what you're doing. Furnishing and decorating your home office, offsite office, or other workspaces might be deducted.
- Investing in photography and videography equipment is a tax write-off as well as a way to get that Instagram-worthy snap of your goods.
- Keep in mind that the expenditures of maintaining your rented space are tax-deductible. You can deduct maintenance costs in a variety of ways, from painting your office to paying for regular cleaning.
- Make sure to keep track of all of your tax deductions so that when tax season rolls around, your write-offs can do what they're supposed to do: protect your company from hefty tax payments