Being self-employed definitely has its benefits. These include things like being able to make your own work hours and to work from absolutely anywhere. Another major benefit, however, is that there are a lot of tax benefits that the self-employed can take advantage of. The sad thing is that not nearly enough of them do! Sometimes, people are simply too lazy to fill out the extra paperwork these benefits require (not a smart move!), but, more often than not, people don’t take advantage of these benefits because they simply don’t know they exist.
Don’t let that be you; don’t miss out on awesome benefits because you’re unaware of them! Read up on available benefits and do your research. Even better yet, hire an accountant or financial adviser who can tell you about available benefits and how to make the most of them. Having someone “in the know” on your side can really make all the difference and can drastically reduce the amount of taxes that you have to pay each year.
Until you hire that accountant, we’ll get you started with a few great benefits you should be utilizing right now!
Benefit #1: The Self-Employment Tax Deduction
If you haven’t heard of the self-employment tax deduction, then you’re missing out!
As you already know, self-employed people are required to pay the employer-required portion of Medicare taxes and social security taxes. The exact amount you’ll have to pay will vary based on several factors, such as whether you have employees and, if so, how many, your filing status, and your income, so if you don’t know how much you owe, definitely check with the IRS! Again, this is where a tax adviser comes in handy because it’s definitely a lot faster and easier to get this information from a professional who works for you than it is to have to get it from a huge, busy, government organization.
What You Can Deduct
Once you’ve figured out how much you have to pay, you might be feeling down, but don’t worry- there’s good news in store! You can deduct half of your total self-employment tax amount from your net income, and you can also deduct your business expenses with some limitations. These vary from person to person and situation, so don’t take this deduction until you’re absolutely sure that you’ve done it correctly. To find out exactly how much you can deduct, the safest bet is to consult with an accountant or tax adviser.
Benefit #2: Individual Retirement Plans
If you don’t already have an individual retirement plan, more commonly known as an IRA, then it’s time to set one up. Not only will this plan help you to pay less in taxes in the coming year, but it will also help you to start saving for your future- trust us, retirement comes faster than you think, and you’ll definitely want to have a nice chunk of change saved up when the time comes.
You’re entitled to open up an IRA if you don’t have any employees, and you can contribute up to $18,000 to it, as well as 25% of your net income. And the best part is that whatever you do contribute is completely tax deductible.
What If You Have Employees?
If you do have employees, you’re not eligible for the individual retirement plan deduction, but don’t worry; there are similar options available to you. Consider a Savings Incentive Match Plan for employees IRA or a Simplified Employees Pension IRA for starters. Both of these offer a good way to provide for your employees and to help yourself in the process!
Benefit #3: The Home Office Deduction
The only catch is that any space you deduct needs to be used solely for business purposes. So if, for example, your office computer doubles as the family computer, or if your office is also the family TV room, it’s a no go. As long as you have a true office space, however, you’re in the clear. Bear in mind, too, that you don’t have to have an entire room as your office, but any small, specific space, such as a closet that you’ve turned into an office or even a separated-out part of another room can qualify.
A lot of people tend to fib on the whole “home office” thing, deducting rooms or spaces that, as described, aren’t used solely as an office space. While it can be tempting to flub the truth for big savings, it’s really not worth it. When you claim this or any deduction, you are always at risk of an audit, which is basically when the IRS sends in someone to validate your claims. Audits are scary even if you have nothing to hide, so just imagine how you’d feel getting audited when you know full well that you’ve told a fib! You could face severe penalties if you get caught, and honestly, you probably will eventually, so it’s always best to tell the truth and stay out of trouble.
We told you this benefit was a good one! When you qualify for this benefit, you can deduct the business percentage of all of the following:
- Deductible mortgage interest
- Homeowner’s insurance
- Home Depreciation
- Home Maintenance
- Utility costs
Figuring out the exact percentage that you’re able to deduct can be a bit tricky though. You can do it yourself by measuring out square footage and plugging it into a mathematical equation that the IRS came up with, or, even better, you could just let a professional handle it for you and (heads up!) you can deduct whatever you pay that person as a business expense.
Benefit #4: The Vehicle Deduction
The benefits just keep coming, don’t they? Our next benefit can be utilized if you travel at all for your business. Even making business trips down to the local post office counts, and hey, every little bit helps, right? Far distances, though, can lead to really big savings, and you can even deduct costs you incur along the way, such as hotel costs and meals eaten on the road.
With this deduction, you can deduct the cost of each business mile you travel using the standard mileage rate (57.5 cents per mile) offered by the IRS. You also have the option of doing the exact calculations yourself, which is time-consuming but could end up saving you more.
If you do decide to calculate actual expenses, it will be worth it. You can include all of the following in your calculations, providing, of course, that you keep careful, provable track of each item:
- Car payments
- Toll fees
- Vehicle depreciation
- Parking fees
- Registration costs
- Garage rental fees
- Insurance costs
- Licensing fees
- Vehicle maintenance
- Vehicular repairs
- Roadside assistance costs
Benefit #5: Communications Deductions
Being good at your business is, of course, going to require you to stay in regular contact with your clients and business associates. As such, the IRS allows you to deduct your business phone, Internet costs, and your fax costs.
As is the case with the home office deduction, you can only deduct expenses as they relate to your business. So, if your family is using the “business internet,” it doesn’t count, at least not in full. You can deduct a portion of the costs, but you’ll have to accurately calculate the percentage of the bill that is actually used on business-related communications.
A Word About Calculations
Doing these types of calculations on your own can get tricky, and if you’re dishonest, even if you’re not deliberately dishonest, you could land yourself and your business in hot water. Therefore, if you’re ever unsure about whether or not you’re deducting correctly, it’s best to let a professional handle that part for you. Calculations such as these can be pretty complex, and honestly, even if you feel fairly confident about your calculating ability, it’s still a good idea to have a pro go over what you’ve come up for and check it for accuracy.
Benefit #6: Work-Related Education Deduction
The IRS just loves it when people go back to school! And, when the self-employed go back to school for things that directly relate to their business, they can deduct those expenses. In fact, even if you’re not formally going to school, you can deduct any educational materials that you buy and use in an effort to help you improve your business or even just sharpen your own business schools.
All kinds of things can be deducted as “educational expenses,” but as always, be completely honest and able to explain yourself in case of an audit.
With that said, here are a few things you can usually safely deduct under this category:
- Tuition for formal schooling
- Research materials
- Costs associated with online classes
- Webinar costs
- Trade publications
- Materials needed for participation in courses
Benefit #7: Health Insurance Premium Deductions
When you’re self-employed, more often than not, you get stuck paying your own health insurance premiums. Fortunately, though, when you do that, you can deduct them from your taxes. This includes ALL of your health-related premiums, such as dental care and long-term care insurance.
Premiums for Others
It gets even better! It’s not just YOUR health insurance premiums that you’re allowed to deduct. If you are paying premiums for your partner, any dependents, or your children, you can also deduct those costs.
Benefit #8: Interest Deductions
Finally, you can deduct any interest that you’re paying on a loan that you used to start your own business or that you used to help pay for business expenses or even dig your business out of the hole. This does not, however, include credit card interest, so don’t bank on that when you start filling out the forms for this deduction.
A Word of Caution
A lot of people, upon hearing about this deduction, will go ahead and take out a loan just so that they can deduct it. This, however, is NOT a smart move and is certainly something that any good financial adviser would warn you against.
While it’s definitely nice to be able to deduct interest you’re paying on a loan, it’s much better not to have to pay that interest in the first place. Thus, only take out a loan if it’s absolutely necessary for your business. Don’t just take one out to get this deduction; if you do, you’ll definitely end up spending more than you’d possibly save, so it’s not worth it in the long-run!
As you can see, being self-employed has lots of benefits when it comes to the IRS and your taxes. These are just a few of many, so if you’d still like to save more (and who wouldn’t?) talk to a professional about other benefits for which you might be eligible. Even if you’re happy with what you’re currently saving, it’s still good to have a pro double-check before you file to make sure you’ve done everything correctly. Happy savings!