5 Must-Know Tax Deductions if You’re Self-Employed
The self-employed lifestyle has many benefits. It’s great being your own boss, having flexible hours, working from home, and having more tax deductions. But whether you run your own business, live off contract work, or freelance for income, tax season can be very stressful if you’re unprepared.
“It’s imperative, if you’re self-employed, that you save money to pay taxes immediately. You should set aside a minimum of 15.3 percent for your self- employment tax. As well as another set percent for your regular income tax,” advises John Curtin, CPA.
Tax deductions can significantly reduce the amount you owe. However, if you’re not careful, they can get blown out of proportion and trigger an audit. To avoid doing this, categorize your expenses first.
Generally speaking, those who are self-employed can write off expenses that fall into three categories:
- Things you use exclusively in operating your business
- Things you eat in the course of doing business
- Things related to the exclusive business use of the place where your business operates
As you prepare for tax filing season, don’t forget to take advantage of these five tax deductions.
Home Office
Many who are self-employed take advantage of working from a home office. The IRS does allow a self-employed person to deduct the portion of their mortgage or rent going toward this space.
You must have a specific area designated for your office, and it must be primarily used for business to qualify for the home office deduction. For example, your office can’t double as playroom for your children after 5 p.m.
Expenses like utilities, phone and Internet can also be deducted based on certain parameters. For example, you can deduct one third of your utility bill if one third of your home is used for your office.
Professional Development
The cost of attending educational seminars and classes can add up for freelancers trying to keep ahead of the competition. The IRS allows freelancers to deduct expenses related to professional development, professional organizations and membership fees.
In addition, they permit deductions on various marketing and advertising services including business development software, web advertising and print ads.
Vehicle Mileage
Tax deductions are available for costs related to vehicle mileage or normal vehicle wear and tear. While you cannot deduct for the commute to and from work, you can include mileage. So if you regularly drive to meet clients or suppliers throughout your workday, keep track of those miles. Being self employed may also affect your car insurance depending on what you do for a living and how you use your car, so double check how your insurance company views your profession.
Business Travel
In addition, the IRS permits business travel deductions including transportation and accommodation costs, but allows only 50 percent for business meal expenses. It’s important to remember that deducting for leisure travel or sightseeing is not permitted and can trigger an audit by the IRS.
Consider Launching an LLC
If you’re an established freelancer, setting up an LLC with the help of someone like Inc and Go has considerable tax benefits. Some of these include lowering the amount you owe in self-employment taxes. Taxes used to pay for Social Security and Medicare are usually split between employer and employee, but as a freelancer you are both. That means you usually end up paying double the amount. An LLC business structure allows you to set up a company in which you’re the only owner and employee, dividing your income between salary and profit.
With an LLC, you won’t have to pay self-employment taxes on your profit when tax season rolls around. In this case, you’re taxed as an individual, rather than a company with employees, according to BizFilings.
Tax deductions are an important topic if you’re self-employed, doing contract work or freelancing full time. Tax preparation for anyone in these categories can get complicated, and it’s always in your best interest to consult with a tax specialist who can give you proper advice, helping you make the most of these deductions. Remember: The money that you make or save does impact your personal bottom-line. Just like that of the corporation you left in the dust for self-employed work.
