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 are worth and taking advantage of self-employment tax deductions. However, many of the self-employed are daunted by the process of submitting taxes and, in some cases, this prevents them from starting a home business. Others do not take the time to fully understand the perks of self-employment at tax time, and they miss deductions that could significantly lower their tax bill.
Self-employment Tax Deductions and Your Eligibility
Here is a list of 16 self-employment tax deductions for which you may be eligible. It's important to develop a system to file and track your receipts and expenses so that you are organized when it comes to tax time.
- 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 deduct a percentage of the costs as time used for business.
- Home Office - The IRS has simplified the home-office deduction in recognition of the increasing number of home-based businesses. There are two ways to take the home office deduction. The easier method is the Simplified Option for 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 multiply 100 X $5 to get $500. The second, or Regular Method, applies expenses by multiplying the percentage of space your office takes up in your home by each applicable expense. For example, if your home is 2,000 square feet and your home office is 100 square feet, you multiply your home office expenses, utilities for example, by .05 (100 square feet is 5 percent of 2,000 square feet). This option is more complicated but may result in a larger deduction.
- Phone Expenses - You cannot deduct the cost of your regular phone except for calls or services that are directly related to your business (e.g., three-way calling). 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 business 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 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, these are also deductible.
- Meals and Entertainment – You can deduct 50 percent 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 receipts for proof.
- Equipment - Equipment, such as computers, cell phones, and printers, 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 should take the deduction over time. This is referred to as depreciation.
- Travel - Business-related travel is deductible as long as it is 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, are 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, 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 – Repair equipment for your business or even a computer can be included.
- Utilities – Utilities include expenses such as electricity, gas, and water. However, you are only allowed to write off a percentage of your utilities based on what is actually used in your business (usually multiplied by the percentage of space your office occupies in your home).
You should also include start-up costs. Consider business licenses, 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 is related to helping you with your business. Essentially, costs that are directly or indirectly necessary for doing business are tax deductible.
The good news is that you don't have to have to conquer this tax beast on your own. A tax specialist can help you to deduct items properly. Using a specialist will also minimize your audit risk, ensure you adhere to the tax laws, and maximize the deductions for which you are eligible.
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.