If you are self-employed, you might be overwhelmed by the expenses you have, including your self-employment tax liabilities. However, you can claim self-employment tax deductions to reduce the amount you owe in taxes.
See how you can take advantage of self-employed tax relief below.
Who is self-employed?
You are self-employed if your business is unincorporated. Generally, self-employment applies to businesses structured as sole proprietorships, partnerships, and limited liability companies (LLCs) that are not taxed as corporations.
Self-employed tax deductions
Self-employed business expenses can add up. But once you take advantage of self-employed tax benefits, you will see a reduction in your liabilities.
You might be wondering, What can I claim for being self-employed? Take a look at this self-employment tax deductions list to get started. Then, learn how you can claim these self-employment deductions below.
1. Self-employment tax
Everyone who works is responsible for paying Social Security and Medicare taxes. But if you’re self-employed, your liability is extra costly.
Employees pay 7.65% to cover Social Security and Medicare taxes and their employer pays the other 7.65%. But because you are in business for yourself, you don’t have anyone splitting your Social Security and Medicare tax obligations with you.
When you are self-employed, you are responsible for paying self-employment tax to cover your Social Security and Medicare tax liabilities. Self-employment tax is 15.3% of your wages. Keep in mind that there are is also a Social Security wage base and additional Medicare tax that may impact your self-employment tax rate.
The thought of extra taxes might be overwhelming for many self-employed individuals. The IRS lets you deduct the employer-equivalent portion of your self-employment tax, which is 7.65%, when figuring out your adjusted gross income. Keep in mind that this self-employment tax deduction only affects your income tax.
You can find the deduction for self-employment tax on Line 57 of Form 1040. You will need to fill out and attach Schedule SE to claim this deduction.
2. Health insurance premiums
When you’re self-employed, you are responsible for obtaining your own health insurance coverage, which can get expensive.
You can deduct the amount you paid for your health insurance premium from your adjusted gross income. Your health insurance plan must be established under your business.
The health insurance deduction applies to the amount you pay for yourself, your spouse, and your dependents. However, you cannot claim a health insurance deduction if you were eligible to participate in your spouse’s health insurance plan.
When you file your Form 1040, report your self-employed health insurance deduction on Line 29.
3. Home office
You can claim the home office deduction if you use part of your home for business. The expenses you can claim include mortgage interest, insurance, utilities, and repairs. However, you can only claim the expenses that apply to the portion of your home that is used solely for business operations.
There are two methods to deduct home office expenses: regular or simplified method.
With the regular method, you must calculate your home office’s actual expenses. You also need to determine what percentage of space your home office takes up. Then, multiply the percentage by your expenses. For example, if your home office takes up 10% of your house’s square footage, you could claim 10% of your utility bills.
If your home office is less than 300 square feet, you can opt for the simplified method. Under this method, you multiply your home office’s square feet by the standard IRS rate of $5 per square foot. This means you can deduct up to $1,500 (300 X $5).
Like the home office deduction, you can claim a business mileage deduction for the business use of your car. To avoid claiming personal uses of your car, you need to keep accurate records.
You can either use the standard mileage rate or the actual expense method to determine the amount you can claim.
The standard mileage rate is a flat amount determined by the IRS. It changes each year. For 2023 the standard mileage rate is 65.5 cents per business mile driven.
With the actual expense method, you need to calculate how much you spent on car expenses. Then, calculate the percentage of your car used for business.
5. Retirement plans
If you are self-employed, you can also deduct contributions to your retirement plan. If you have a SEP or SIMPLE IRA, or another qualified plan, you can deduct up to the IRS limit.
You can claim retirement plan tax deductions on Form 1040, Line 28.
When starting or running your business, you might have taken out a small business loan. Loans can be a great way to fund your business, but the interest can accumulate rapidly.
Another self-employment tax deduction you can take is interest on a business loan or credit card.
7. Travel and meals
For business-related trips, you can claim 100% of your travel deductions. And, you can claim 50% of your meals if you are traveling for business. Likewise, you can claim 50% of meal expenses if you take a client out.
Travel expenses include transportation, lodging and meals, and dry cleaning. You can classify expenses under the travel deduction if you are traveling away from home and incur expenses that are ordinary and necessary.
8. Business insurance, licenses, and permits
If you need insurance, licenses, or permits for your business, you can deduct the costs.
Getting business insurance is an important part of running your business safely and legally. For example, you might decide to get general liability insurance for your business.
Obtaining business licenses and permits are also essential for running a legal operation. You can deduct business registration fees and permits. And, you can deduct licenses you need to obtain to run your business.
9. Legal and professional fees
Getting professional help from advisors like attorneys and accountants can help you make sure your business is set up correctly, your finances are on track, etc.
You can deduct legal and professional fees that are ordinary, necessary, and relate to your business.
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This article is updated from its original publication date of May 22, 2018.This is not intended as legal advice; for more information, please click here.