IF YOU’RE SELF-EMPLOYED KEEP AN EYE OUT FOR OVERLOOKED TAX BREAKS AND DEDUCTIONS
Give yourself a pat on the back: You’ve made the move to self-employment, leaving behind the too-long commute and the too-little compensation of working for someone else. How to maximize your success and earnings? Take advantage of any and all assistance, including lowering your tax bill. The following five tips can help you make the tax laws work for you while you’re working for yourself.
Home Office Deductions
If you use your residence — whether it’s a house, apartment, or condo — regularly and exclusively for your business, the government might subsidize items generally considered personal expenses. Some common deductions include utility bills and insurance costs, and the IRS has developed a simplified method that allows taxpayers to deduct $5 for every square foot that qualifies for the deduction. For example, if you have a 300-square-foot home office your deduction is $1,500.
No Speed Bumps: Deducting Driving Your Own Car For Business
A self-employed person who drives to a client’s location, makes deliveries, or uses a personal vehicle for work-related purposes can claim a deduction. You can either use a standard mileage rate (deduct 58 cents for every mile driven for business) or add up car-related annual expenses and multiply the total by the percentage of total business miles driven.
Social Security Taxes: A Write-Off That’s Rightfully Yours
Employees can’t deduct the 7.65% of pay that goes to Social Security and Medicare. But self-employed individuals get a break on this: If you’re self-employed and pay the full 15.3% tax yourself (instead of splitting it 50/50 with an employer) you can write off half of what you pay.
Tax Sheltered Retirement Plans: Take Savings To The Limit
Those who are self-employed can contribute pretax money to a simplified employee pension (SEP) or a solo 401(k). Both have higher annual limits as compared to an individual retirement account (IRA) — but you can have an IRA as well, if you so choose.
Health Insurance Premiums
To get this break (and for the record, most taxpayers don’t), employees need to itemize medical expenses. Additionally, you get a deduction only to the extent your expenses exceed 7.5% of your adjusted gross income. But if you’re self-employed you can deduct what you pay for medical insurance for yourself and your family — without itemizing and without taking into consideration the 7.5% threshold.