Are you self-employed and you’re worried whether or not you can save money on your tax payments? The answer is ‘yes’ - you can. Here are 7 self-employed tax tips which you can follow to reduce the amount you need to pay to Uncle Sam.
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If you are using a part of your home or apartment for your home office, then you can deduct a part of your insurance cost and utility bills against what you earn from your business. However, most people don’t claim this just to avoid the recordkeeping hassles.
Without doing all these things, you can simply deduct $5 for every square foot of your home office; that is, the area that you use only for your entrepreneurship. The maximum size allowed is 300 square feet home office, that is, you can deduct $1,500 from your tax payments. You can do this every year if you have a qualifying home office.
In addition to the above, you can also opt for tax depreciation of property and equipment if you’re using it to generate income. However, you can’t purchase and sell off the property in 1-year period. You can deduct certain repair work on the property. When you purchase an equipment, you have to choose whether you want to opt for expensing or depreciation.
In case of expensing (Section 179 deduction), you can deduct 100% of the qualifying cost in the first year and the amount is up to $500,000. It’s quite a big amount - Isn’t it? However, the amount will get reduced if you purchase more than $2 million new assets into service in a single year. If you opt for tax depreciation, you can deduct the expenses over the years of life of an equipment.
Source: Principal Financial Group
If you don't have any employees working under you, you can open an individual 401(k). You can contribute $18,000 as a 401(k) deferral along with 25% of your net income.
If you have employees, you can opt for SIMPLE (Savings Incentive Match Plan for Employees) IRA or SEP IRA (Simplified Employee Pension IRA) if you qualify the eligibility criteria. According to John L. Hillis, the president of Hillis Financial Services in San Jose, California, retirement plans are “absolutely the No. 1 tax deduction. The government is helping fund retirement.”
Source: Getty Images
When you are self-employed and have to pay 15.3% tax all by yourself, you can deduct half of what you pay. You have to claim this deduction on Form 1040.
Source: The TurboTax Blog - Intuit
Do you have to travel for your entrepreneurial venture? Yes? Then you’re eligible for certain self-employed tax deduction on your automobile expenses. It doesn't matter whether you had to travel long distance or short distance. Make sure you deduct as per the standard mileage rate, which is 54 cents for 2016. It is better if you check the mileage rates allowed by the IRS, since it may change every year.
As per Jéneen R. Perkins, principal of Éclat Enterprises LLC, in Milwaukee, Wisconsin:
“If you decide to use actual car expenses, be sure to include payments, depreciation, registration, insurance, garage rent, licenses, repairs and maintenance, and parking and toll fees."
“If you decide to use the standard mileage rate, it would be in your best interest to keep a log – daily, weekly or monthly – of miles driven to distinguish personal use from business use.”
To deduct your medical expenses, first of all, you have to opt for itemized deduction. Secondly, you’ll be eligible for deduction if your expenses exceed 10% of your AGI (Adjusted Gross Income). However, for 2016 tax returns, it’s 7.5% for people aged 65 years or more.
When you have your own business, there’s additional entrepreneurial tax tips for self-employed people. You can deduct what you have to pay for your and your family’s medical insurance irrespective of whether or not you opt for itemized tax deduction and the 10% threshold is also not applicable. However, you can’t claim this deduction if you’re already eligible for employer-sponsored health insurance policy either through your additional job or from your spouse’s job.
Source: US News & World Report
Another self-employed tax benefits is that you can get business deduction for work-related education. If you’re pursuing a degree or have to buy certain research materials to make your business more successful, then you can deduct this cost. While doing so, don’t forget any business eBook you’ve purchased or work-related webinar you’ve attended. If you buy online, make sure you keep the e-receipts to claim these deductions.
While gaining knowledge about tax tips for entrepreneurs and what you need to do, check out what you should not do during this tax season. If you want guidance, you can post your queries in the DebtCC Forum and know what experts have to say.