Thanks to advances in technology, more and more people are becoming self-employed. And there are a lot of perks that come with self-employment. Being your own boss is a great feeling. And when it comes to tax time, there are a number of tax deductions and benefits that you can take as well.
Let’s start with the common ones:
Supplies, Advertising, Education, and Travel
You can deduct the full cost of office supplies and advertising. That means everything from the paper and pens you use to the business cards you purchase to the ads you run on Facebook. Be sure to keep all of your receipts, because if you are audited, you will need all of this information.
If you have to travel for your job, you can deduct the cost of the flights and hotel rooms, but be aware, the trip must be for the purpose of your work. If you’re taking a meeting in another state, then staying a few extra days to go hiking, you may run into trouble.
In terms of meals, you can deduct 50% of the cost of all of your business meals. Some advise that you write what you discussed on the back of the receipt so that it’s clear it was a business meal.
If you take any classes related to your job, that can also be deducted. These must be classes for a business already in existence though, not something for a new business. This most often applies to people with continuing education requirements to keep up licensing or people looking to get additional certification in a subject.
You hear a lot about home office deductions. I have a home office and work from home from time to time, but I don’t deduct anything for it. The key to a home office is that it has to be an isolated place used only for business. If you also use it for other purposes (as I do), or you work from your kitchen table or the corner of a guest room, that doesn’t count. If you do have a home office, you can deduct a portion of all of your home expenses, but you will have to keep good records of your utilities and the like. You can also take a standard deduction based on the space, but you will be able to deduct significantly less, so it certainly benefits you to keep these records.
Phone and Internet
You can deduct phone and internet costs, but only the amount that you use for business. While you don’t have to be exact, you will need to figure out what percentage of your phone and internet use is business and what percentage is personal. You don’t have to be precise, but you need to make an educated guess.
Insurance and Retirement
You can deduct the cost of your business insurance (malpractice, liability, etc), but you can also deduct your health insurance premiums if you are paying them yourself and not through a spouse’s workplace provided insurance.
You can also deduct your contributions to a SEP-IRA, as much as 25% of your earnings up to a max of $56,000. And if you use a traditional IRA, you are, of course, eligible for the same deductions as those not self-employed.
Starting a business requires investment in equipment, legal fees, and other expenses. You can deduct up to $5000 in startup expenses.
Mileage and Vehicle Expenses
If you drive for your business, you can deduct mileage and vehicle expenses. You can take a standard deduction or deduct 58 cents per mile. That requires keeping a log of your mileage, and there are a number of great apps out there to help you keep track. You can also just keep a file on your computer or phone or go old school with a notebook in the glove compartment. Just don’t lose it.
Credit Card and Loan Interest
If you pay interest on a credit card for your business or interest on a business loan, you can deduct the amount of the interest. It is best to have a separate credit card for your business so that this interest is clearly defined and not commingled with your personal expenses.
Take a deep breath. It’s not that bad, I promise.
When you’re self-employed, you pay a self-employment tax, which is the employer part of Medicare and Social Security. This is taxed at 15.3%. It’s not an insignificant amount of money. But when you are filing your tax returns, you can deduct half of that, which will definitely help your bottom line.
Should You Hire a Professional?
This is definitely something you should consider, depending on the complexity of your taxes. If you’ve kept good records, there are good instructions out there and you may be okay. You can also use one of the various programs available for purchase to do your taxes. Whatever method you choose, the most important thing is to keep good records. Even if you just shove all of your receipts into a box and then organize them in January, if you have the information available, doing your tax returns won’t be too bad.