The self-employed workers such as freelancers and entrepreneurs should be aware of all the tax deductions available, to allow you to save money and time during the tax season.
Once you’ve made a habit of setting aside money for taxes, you can keep more of it in the bank by claiming the following self-employment tax deductions.
- Self Employment Tax
- Home Office Expenses
- Internet and Phone Bills
- Health Insurance Premiums
- Business Travel
- Business Meals
- Vehicle Expense
- Interest on Loans and Bank fees
- Business Insurance
- Retirement Plan Contributions
Self Employment Tax
Self-employment taxes can be a shock to those who are filing business tax forms for the first time. As a self-employed person, you have to pay more for Medicare and Social Security taxes, because you don’t have an employer splitting the cost with you. In total, the self-employment tax is 15.3%.
Luckily, the IRS allows freelancers and entrepreneurs to deduct the amount equivalent to what an employer would cover if you were an employee, which is half of the self-employment tax contributions.
Home Office Expenses
The home office deduction is often misunderstood. An office needs to be an area that is used regularly and exclusively for business purposes. 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.
There are two methods to calculate the deduction: the simple method or the regular method. Under the simple method, you can deduct $5 for every square foot of your home used in your business (up to 300 square feet). The regular method requires that deduct expenses based on the percentage of your home that your home office makes up.
Internet and Phone Bills
Regardless of whether you claim the home office deduction, you can deduct the business portion of your phone, fax, and internet expenses. The key is to deduct only the expenses directly related to your business. For example, you could deduct the internet-related costs of running a website for your business.
If you work from home and use your personal internet and phone services for business, you need to calculate what percentage of the time those services are used solely for business purposes.
According to the IRS website, “You can’t deduct the cost of basic local telephone service (including any taxes) for the first telephone line you have in your home, even if you have an office in your home.” If, however, you have a second landline used exclusively for business, you can deduct the cost as a business expense.
Health Insurance Premiums
If you are self-employed, pay for your own health insurance premiums, and are not eligible to participate in a plan through your spouse’s employer, you can deduct all of your health, dental, and qualified long-term care (LTC) insurance premiums.
You can also claim the amount you paid toward your health insurance premiums on your income tax return as an adjustment to income. The deduction covers your own health insurance premiums as well as any coverage you purchased for spouses and dependents.
To qualify as a tax deduction, business travel must last longer than an ordinary workday, require you to get sleep or rest, and take place away from the general area of your tax home (usually, outside the city where your business is located).
If your trip meets those standards, you can expense 100 percent of the cost of flights, hotels, car rentals, dry cleaning and tips. You can also expense 50 percent of the cost of meals while traveling.
Keep complete and accurate records and receipts for your business travel expenses and activities, as this deduction often draws scrutiny from the IRS.
A meal is a tax-deductible business expense when you are traveling for business, at a business conference, or entertaining a client. The meal cannot be lavish or extravagant under the circumstances, and in the past, you could only deduct 50% of the meal’s actual cost if you keep your receipts, or 50% of the standard meal allowance if you keep records of the time, place, and business purpose of your travel but not your actual meal receipts.
Be sure to save all your meal receipts so you can track all the relevant information for your tax return. You might want to jot down a few notes on the back of your receipt so you remember all the necessary details of the meal.
When you use your car for business, your expenses for those drives are tax-deductible. Make sure to keep excellent records of the date, mileage, and purpose for each trip, and don’t try to claim personal car trips as business car trips.
You can also expense your mileage for business purposes by using the IRS standard mileage rate. For 2018, the standard mileage rate is 0.58 dollars per mile, so you’ll need to multiply your business mileage by 0.58 to determine how much you can write off as a business expense.
Interest on Loans and Bank fees
Interest on a business loan from a bank is a tax-deductible business expense. If a loan is used for both business and personal purposes, the business portion of the loan’s interest expense is allocated based on the allocation of the loan’s proceeds.
You will need to track the disbursement of funds for various uses if the entire loan is not used for business-related activities. Credit card interest is not tax-deductible when you incur the interest for personal purchases, but when the interest applies to business purchases, it is tax-deductible.
That said, it’s always cheaper to spend only the money you already have and not incur any interest expenses at all. A tax deduction only gives you some of your money back, not all of it, so try to avoid borrowing money. For some businesses, though, borrowing may be the only way to get up and running, to sustain the business through slow periods, or to ramp up for busy periods.
The cost of any business insurance or professional licenses you need to run your business can be deducted for tax purposes. You just have to ensure the insurance or licenses you deduct apply solely to your business.
Retirement Plan Contributions
Self-employed workers can’t rely on employer-funded retirement savings plans, so as a self-employed person, you can deduct contributions to your retirement plan on your income tax filings. If you have a Simplified Employee Pension (SEP) or an Individual Retirement Account (IRA), you can deduct the cost of the contributions, up to the limit set by the IRS. Refer to the IRS retirement plan contribution limits for more information.
Any education expenses you want to deduct must be related to maintaining or improving your skills for your existing business. The cost of classes to prepare for a new line of work isn’t deductible.18
If you’re a real estate consultant, taking a course called “Real Estate Investment Analysis” to brush up on your skills would be tax-deductible, but a class on how to teach yoga would not be.