BEING YOUR OWN BOSS gives you access to tax incentives not available to other workers. These include self-employment tax deductions for a home office, vehicle expenses and internet service.
While these deductions can save you money, don’t expect them to wipe out your tax bill completely, says Kristen Anderson, founder and CEO of Catch, an app designed to make it easier for self-employed workers to set aside money for taxes and benefits such as retirement and insurance. “Finding out you owe $10,000 in taxes instead of $15,000 is a big win, but not if you don’t have anywhere close to $10,000 set aside,” Anderson says.
Once you’ve made a habit of setting aside money for taxes, you can keep more of it in the bank by claiming these self-employment tax deductions.
Here are self-employment tax deductions and benefits to claim:
- Mileage or vehicle expenses.
- Retirement savings.
- Insurance premiums.
- Office supplies.
- Home office expenses.
- Credit card and loan interest.
- Phone and internet costs.
- Business travel and meals.
- Start-up costs.
- Continuing education.
- Self-employment taxes.
Mileage or Vehicle Expenses
Self-employed taxpayers can deduct either their actual operating expenses for using a vehicle for business purposes or claim a standard mileage deduction. In 2019, the standard mileage rate for business is 58 cents per mile. “Everyone’s situation is unique but, typically, mileage is going to be a better option,” says Bryan Bibbo, an accredited investment fiduciary with JL Smith Group, a wealth advisory firm in Avon, Ohio.
“The key to getting your mileage deduction is a mileage log,” says Paul Joseph, a CPA, attorney and owner of Joseph & Joseph Tax and Payroll in Williamston, Michigan. If the IRS conducts an audit, it will want to see that log, which should include the date, destination, miles driven, odometer readings and purpose of each trip. You could record this information in a notebook kept in your vehicle or use a mileage app such as MileIQ or TripLog.
All workers younger than age 50 can deduct up to $6,000 in contributions made to a traditional IRA in 2019. For workers age 50 and older, up to $7,000 is deductible. However, self-employed individuals can use a SEP IRA which lets them contribute – and deduct – as much as 25% of their net earnings, up to $56,000 in 2019.
The contribution limits for IRAs apply to the total amount deposited in both traditional and Roth accounts. Contributions to Roth accounts are not tax deductible, but earnings withdrawn in retirement are tax-free. Talk to a finance professional to determine which retirement savings strategy will maximize your long-term tax savings.
Business insurance premiums for liability, malpractice or other professional needs can all be deducted. What’s more, deductions for some personal polices are allowed as well. Health, vision and dental insurance premiums can all be deducted by those who are self-employed.
“That is a huge deduction for you,” Bibbo says. Long-term care insurance premiums are another deductible insurance expense, and one that is commonly overlooked by self-employed workers, according to Bibbo.
Printer paper, ink, pens and other office supplies used over the course of a year are all tax deductible. However, you’ll need to keep detailed receipts, and your credit card or bank statement won’t suffice. “If you get pulled for an audit, that summary sheet won’t help you,” Joseph says.
Home Office Expenses
The home office deduction is often misunderstood. “(A home office) is supposed to be an isolated place used exclusively for business,” Joseph says. That means a kitchen counter or desk in a family room won’t qualify.
If you have a dedicated home office space, you can deduct a portion of your home expenses, such as utilities, insurance premiums, mortgage interest and real estate taxes. For those who don’t want to track all their expenses, a simplified deduction is available. It offers a $5 per square foot deduction, up to 300 square feet. While easier to claim, the simplified option will result in a lower deduction for most people, Bibbo says.
Credit Card and Loan Interest
If you pay interest on a credit card or loan used for business purposes, that may be deductible. However, interest on purchases made for personal use are not deductible. For this reason, it’s advisable to have a dedicated credit card for business expenses.
Phone and Internet Costs
Phone and internet expenses can be deducted by self-employed taxpayers but only to the extent those services are used for business. For instance, if you split your phone use between personal and business calls, half your bill is deductible. While there is no need to determine your business use precisely, be sure your records will reflect whatever percentage of phone and internet service you deduct. “Making an educated guess isn’t a bad thing,” Bibbo says, “but if you get audited, you’re going to need to back it up.”
Business Travel and Meals
The Tax Cuts and Jobs Act of 2017 eliminated business deductions for entertainment expenses, but you can still deduct 50% of the cost of business meals. To ensure there are no questions about the legitimacy of these expenses, Joseph recommends writing on receipts who you met and what was discussed.
Business travel expenses, such as flights and hotel rooms, are fully deductible, but the trip must have a clearly defined business purpose. “People think everything is deductible,” Bibbo says, but that’s not the case. The cost of a family vacation, for example, can’t be deducted just because a single meal was spent discussing work.
Starting a business can require a significant investment in legal fees, technology, market research and other costs. Fortunately, the IRS allows up to $5,000 in startup expenses to be deducted. The deduction can be reduced, however, if your total startup costs exceed $50,000.
Attorneys, accountants and physicians are only a few of the professionals who may need to take continuing education classes to maintain an industry credential or license. Other self-employed individuals may take classes to expand their skill set. Either way, those education costs can be deducted.
While these education expenses could be used to claim the Lifelong Learning Credit instead, Bibbo thinks deducting them as a business expense may make more sense financially. In that way, the deduction reduces both self-employment taxes and income taxes. Still, everyone’s situation is different. “I always tell clients to do the math” before deciding whether to claim the deduction or the credit, Bibbo says.
Costs associated with promoting your business and services can also be deducted. This can include social media promotion, online banner ads, billboards, print media and business cards.
Self-employment taxes can be a shock to those who are filing business tax forms for the first time. “Many self-employed people don’t realize when they first get started that the self-employment tax is twice what employment taxes are for traditional workers,” Anderson says. That’s because self-employed people must pay both the employer and employee side of Social Security and Medicare taxes. In total, the self-employment tax is 15.3%.
To offset the extra cost, the IRS allows a deduction of half a person’s self-employment taxes. While that won’t reduce how much self-employment tax is owed, it can help reduce income taxes.