Self-employed people enjoy the freedom of choosing their work hours, working from wherever is most convenient for them, and picking only clients that suit them. In return, however, they have to pay their own operating costs and file tax returns for their businesses. Herein lies the problem: tax laws are not often favorable to the self-employed.
According to the Founder of G.I. Tax Service, Glenn Sandler, however, it’s not all bad. If you are self-employed, you are entitled to some tax write-offs in the new Tax Cuts and Jobs Act; these should provide some relief, help you invest more in your business, and pay less to the IRS.
Self-Employment Tax Deduction
The IRS considers self-employed workers as both the employer and the employee. Therefore, you have to pay both employer and employee tax contributions to Social Security and Medicaid. Luckily, the employer part of the payment is tax-deductible, so you end up paying only 50% of the self-employment tax.
Individuals can set up retirement accounts (e.g., solo 401(k), SEP-IRA, SIMPLE-IRA or other qualified retirement plans) for themselves and contribute up to $18,500 per year + 25% of their net annual income. Contributions made to retirement accounts are deducted from your taxable income, making it possible for you to reduce your taxes and save up for your retirement.
Rent and Business Insurance
Rent paid on office space is tax-deductible. If you rent any equipment for business use, that expense can also be deducted. If, however, you own the property (even partly), then rent paid on it cannot be deducted.
Additionally, premiums paid for any insurance taken out to protect your business (via business liability insurance, car or business vehicle insurance, fire insurance, credit insurance, etc.) are deductible from your taxes.
Expenses incurred on property and equipment purchases are also deductible via depreciation. However, the following criteria must be met: you must own the property, it must generate income, you must be able to estimate how long the property will continue to generate income for, its lifespan must exceed one year, and the property cannot be bought and sold in the same year.
Home Office Deduction
This allows you to deduct the cost of your home workspace (used consistently and exclusively for business) from your taxable income. According to Glenn Sandler, this is one of the more complicated tax write-offs and people who leverage it must be able to defend their deductions in case of an audit. The simple rule here is: you must only deduct expenses (e.g., phone, internet, and electricity costs) that were used for business and business only. For an in-depth understanding of the home office deduction, please contact a tax professional.
People don’t often remember that expenses incurred for educational purposes are also tax-deductible. The cost of a seminar taken, an online course/material bought, college courses enrolled in to become better at your work can be deducted from your tax. Just remember to keep all the receipts.
There are many other tax write-offs available to the self-employed and small business owners. Please note, however, that most of them have laws that guide them and you must be sure not to break any of them. If you do not want to deal with the complications, consult a tax expert at G.I. Tax service today and take full advantage of as many of the deductions as possible.