Self-Employed Tax Deductions You Don't Want to Miss
Don't leave money on the table come tax time
Being your own boss has many financial perks, such as earning what you're worth and self-employment tax deductions. But as awesome as these benefits are, for many, doing self-employment taxes is scary and stops them from starting a home business. Others, don't take the time to understand the perks of self-employment at tax time and end up missing deductions that can lower their tax bill.
Eligible Self-Employment Tax Deductions
Here is a list of 15 self-employment tax deductions you may be eligible to take. In order to easily track these expenses, you should develop a tax organization system for recording them.
- Internet Fees – If you have a website or use the Internet to do business, some or all of your Internet costs may be deductible. If you or your family also use the Internet for non-business purposes, you can only deducted the percentage of time used for business.
- Home Office - There was a time that taking the home office deduction was thought to increase your risk of an audit. It no longer seems to be the case, and in fact, the IRS has made taking this deduction easier. There are two ways to take the home office deduction. The easier method is the Simplified Option, in which you multiply the square space used for your home office by $5. For example, if your home office is a 10 foot by 10-foot space, you'd multiply 100 X $5 to get $500. The second Regular Method allows you to use actual office expenses, depreciation, etc. all multiplied by the percentage of space your office takes up in your home. For example, if your home is 2000 square feet and your home office is 100 square feet, you'd multiply your home office expenses (i.e., utilities) by .05 (100 square feet is 5% of 2000 square feet). This option is more complicated but may result in a larger deduction.
- Phone Expenses - You can't deduct the cost of your regular phone, except for calls or services (i.e. three-way calling) that are directly related to business. You can deduct the full expense of having a second, business-only line in your home. You can also deduct your business-related cell phone expenses. Similar to the Internet expense, if you also use your cell phone for personal use, you can only deduct the direct businesses expenses (i.e. business apps) and the percentage of time the phone is used for business reasons.
- Office Supplies - Office supplies used exclusively for your business are deductible.That includes paper, pens, ink, folders, staples and anything else needed to do business.
- Advertising and Promotion – This is a huge chunk of many businesses budgets and includes any materials or services that you use to promote your business including web hosting, business cards, advertising, fees to marketing agencies or promotional video producers, etc.
- Dues and Subscriptions - If you belong to any professional associations, networking organizations, or subscribe to trade journals specifically to help you in your business, you can deduct these costs.
- Licenses and Permits – Business registration fees and permits are deductible.If you have fees related to the type of business you run, such as a child care license, that's deductible as well.
- Meals and Entertainment – You can deduct 50% of the cost of taking your clients to lunch or dinner. Keep a log of who was at the dinner, what was discussed, and where the meal took place. Save the receipt for proof.
- Equipment - Equipment such as computers, cell phones, and printers, etc. can be partially or fully deductible. Equipment necessary to run your business is also deductible (i.e., lawn equipment for a landscaping business). For large cost items, you'll need to take the deduction over time, referred to as depreciation.
- Travel - Business-related travel is deductible, as long as it's short-term (not indefinite travel) and required for business. Keep all your receipts and business information related to the travel.
- Auto Expenses – Like the home office deduction, you can use a simple calculation multiplying that year's mileage allowance with the total number of business miles driven, or you can use actual costs related to the business use of your car. Whichever you use, keep track of your business usage if the vehicle is also used for personal use.
- Outside Services - Costs related to your business, such as tax and accounting help, or any other guidance is typically deductible.
- Insurance Premiums – If you are self-employed and pay for your own health insurance, you can write off your premiums if you meet certain requirements. You can also deduct life, property and casualty, or business insurance.
- Rent or Lease Payments – If you are renting an artist studio or paying a building lease, you may be able to write off these payments.
- Repairs and Maintenance – Repairing equipment for your business or even a computer counts.
- Utilities – This involves expenses such as electricity, gas, water.etc. However, you're only allowed to write off a percentage of your utilities based on what's actually used in your business (usually multiplied by the percentage of space your office occupies in your home). Consulting a tax specialist can give you a better understanding on how to do this properly.
Don't forget to include start-up costs in your home business. Some of the categories above cover this (i.e., a business license), but your startup may also include legal fees, buying a domain name, setting up your business structure, such as a limited liability company, and hiring a graphic designer for logo creation. Hiring a consultant or coach may also be deductible if it's related to helping you with your business. Essentially, costs that are directly or indirectly related and necessary to your doing business are tax deductible.
The good news is that you don't have to have to conquer this tax beast on your own. If you feel like you could use a hand in doing your home business taxes, consider consulting with or hiring a tax specialist. They can help you minimize your audit risk, ensure you keep on the straight and narrow of the tax laws, while at the same time ensure you're taking all the deductions you're qualified to take.
Another, less expensive option is to use financial software to manage your business money and import it into tax software when it's time to do taxes.
Disclaimer: I am not a tax specialist or licensed tax attorney. The information provided here should be used as a general guide. For specific questions about your own taxes, please consult a tax specialist or refer to the official IRS publications. The IRS online has a great deal of information on self-employment tax.
Updated October 2016 Leslie Truex