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Self – Employed Expenses and Tax Deductions

Tax Deductions
Written by Mitali Dutta

Selfemployed professionals face exclusive challenges when tax season comes around. But because they don’t have taxes abstained from their paychecks like traditional workers, they can use deductions to cover their expenses and curtail their tax burden. But when it comes to self-employed deductions, the procedure certainly isn’t one-size-fits-all.

  1. Self-employment tax:

You already know that wages are accountable to Social Security and Medicare taxes, collectively called FICA (Federal Insurance Contributions Act) taxes or payroll taxes since they are taken right out of your paycheck. Not everyone is well acquainted, that there are corresponding taxes on self-employment income, sometimes called SECA (Self Employment Contributions Act). A crucial difference between the two is that if you are employed by a business, you pay Social Security (6.2%) and Medicare tax (1.45%) as the employee, and your employer kicks in tax at the same rates (6.2% and 1.45%, respectfully) on your total wages. If you’re self employed, you pay both sections. Fortunately, you can diminish the portion of your self-employment tax equivalent to what an employer would pay (meaning Social Security (6.2%) and Medicare tax (1.45%)) on the front page of your tax return on line 27 (highlighted below) as an “above-the-line” deduction, or adjustment to income. You cannot deduct the other section of Social Security and Medicare taxes, neither can wage earners.

  1. Retirement savings:

If you contributed to a selfemployment SEP (simplified employee pension) plan, SIMPLE (savings incentive match plan for employees) plan, or qualified plan like an H.R. 10 or Keogh plan during the year, you can cut back contributions you make to the plan for yourself on the front page of your tax return. Small business owners also get a break. You can also lessen trustees’ fees if contributions to the plan don’t cover them. All types of rules and limits are applicable to retirement plans, therefore, work with a plan administrator or financial advisor.

  1. Selfemployed health insurance deduction (& other medical expenses):

Health insurance is one of the expensive purchases you might make all year for your business. Luckily, you may be able to deduct the amount you paid for health insurance, including Medicare premiums. To qualify for the selfemployed health insurance deduction, you must have a total profit for the year reported on Schedule C, Schedule C – EZ, or Schedule F, and the insurance plan must be considered to be established, under your business. If you qualify, you’ll subtract the cost of the premiums on the front page of your tax return. As with retirement savings, if you have employees, you can subtract the cost you pay for a corresponding plan.

Claiming the selfemployed health insurance deduction doesn’t stop you from deducting other medical expenses: you can still include your out-of-pocket medical expenses, like doctor’s visits and prescriptions, on a Schedule A (with the exception of your health care premium.

  1. Advertising & promotion costs:

You’re granted a deduction for the costs associated with getting the word out about your business. This can include not only distinguishable advertising like Yellow Pages or newspaper, magazine, TV or radio advertising but also less inyourface promotions like the cost of printing business cards and business related. And it’s not just the end product that’s deductible: you can also subtract reasonable costs of coming up with ad copy or slogans, as well as creating graphics and logos. The costs combined with your website are deductible, including the cost to purchase and maintain the site and hosting fees. Think differently as well : the costs of creating and hosting seminars and workshops meant to lure in customers can be deductible as are community sponsorships, like putting your business name on Little League and other team tee-shirts.

  1. Car & truckrelated expenses:

You can diminish the cost of expenses related to a car or truck, including lease payments, as long as you use your vehicle solely for business. If you use the vehicle for personal and business purposes, you can only withdraw the portion attributable to business. Calculate the deduction by using standard mileage rates, or you can diminish the actual expenses (for example gas, oil, repairs, insurance, and license plates)

  1. Insurance premiums

You can deduct premiums that you pay for business linked with insurance. This can constitute of errors and omissions insurance; professional malpractice insurance; general liability insurance; and workers compensation insurance the cost to insure your premises from fire, storm, theft, accident, or similar losses.

  1. Legal and professional service fees.

Businessrelated legal fees are deductible, so are fees you pay your accountant and/or tax preparer to keep you updated. The costs related with payroll services, insurance brokers, consultants, human relations (HR) personnel and other professionals that you hire to keep your business going.

  1.  Office supplies

Office supplies.If you have a ton of stationery in your office where you work, you can deduct those supplies as necessary and ordinary business expenses. And depending on where you work, deductible office supplies may also include such daily out of pocket costs as copy paper and toilet paper (you need them anyway).

  1. Taxes and licenses

Taxes and licenses related to running your business may be deductible which includes real estate taxes you pay on business real estate as well as property tax you pay on business assets. It is also composed of annual license fees charged by your state or local government. While it doesn’t include federal income taxes paid, it does include the employer portion of Social Security and Medicare taxes on employee pay, also the federal unemployment tax and certain state unemployment or disability tax.

  1. Home office deductions

It is one of those business deductions that is misunderstood and often abused. In order to qualify for the deduction, you must use the part of your home attributable to business “exclusively and regularly for your trade or business” and the part of your house will be solely a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business; or a separate structure used in connection with your trade or business.

About the author

Mitali Dutta

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