With self-employment comes freedom, responsibility, and a lot of expense. You take on risks and costs that you don’t have when you work for someone else. Having your own business definitely increases the amount of record-keeping you have to do for tax purposes. When you’re digging through boxes of business receipts, it’s easy to envy people who only have to enter income from a W-2 form.
As a self-employed person, you get some tax breaks that your employed friends don’t. When it comes time to file your returns, don’t hesitate to claim the benefits you get for being the boss. As a self-employed success story, you’ve earned them. These tips can make tax time less painful and help you take advantage of some of the tax benefits of working for yourself:
Self-employed people must pay self-employment taxes
The self-employment tax refers to the employer portion of Medicare and Social Security taxes that self-employed people must pay. Everyone is subject to paying these taxes, which in 2018 are 7.65% for employees and 15.30% for self-employed. Paying extra taxes to be your own boss is no fun. The good news is that the self-employment tax will cost you less than you might think because you get to deduct half of your self-employment tax from your net income. The IRS treats the “employer” portion of the self-employment tax as a business expense and allows you to deduct it accordingly.
Schedule and keep current with estimated tax payments
In the United States, our tax system is pay-as-you-go. When you work for someone else, your boss withholds your paycheck for taxes and sends that money to the taxing authorities on a regular basis.
When you become self-employed you take on the responsibility of paying quarterly estimated tax payments for both income tax and self-employed taxes. Failing to make these periodic payments or underreporting your income may result in penalties and additional interest.
Keeping current estimated tax payments requires discipline, and we comment really trying to stay on top of this. Plotting due dates and writing checks is essential even if it hurts and you will be glad you stayed on top of it when tax time rolls around.
Contributions to retirement plans can reduce your taxable income
One of the top business tax breaks for entrepreneurs is for making contributions to your own retirement plan. The government wants to help fund your retirement, and this may be the most valuable tax break available to solopreneurs.
If you are in business for yourself and have no employees, consider setting up an individual 401(k) plan. For 2018, you can contribute up to $18,500 in pre-tax earnings to a 401(k) plan, plus an additional $6,000 if you’re 50 or older. You also can contribute up to 25% of your net self-employment income—up to a total of $55,000 for 2018—into a retirement plan like a Simplified Employee Pension plan, or SEP-IRA.
Take full advantage of all available business tax deductions
As a self-employed individual, your eligible to write off far more business expenses than employees every dreamed of and you will want to take advantage of every one of them. It is essential to learn about these deductions and find out which ones you can benefit from. Many solopreneurs also choose to outsource their tax preparation and assistance to ensure they are not paying more than they owe.
Deductible expenses are defined by the IRS as all of the expenses that are ordinary and necessary for your business to operate. Here are some common business deductions you won’t want to miss:
Expenses related to the business use of your home:
• A certain amount of rent
• Internet Service
Business use of your vehicle based on business automobile expenses or the standard IRS allowable mileage rate for your tax year. The taxpayer may file the actual expense he incurred, or use the standard mileage rate prescribed by the IRS, which is 54.5 cents as of 2018.
Depreciation of some property and equipment you purchase can also be tax deductible. Some self-employed people may purchase property and equipment for a business. If they expect that property to last longer than one year, it should be depreciated on the tax return. You must own the property and it must be used or held to generate income. The property should have an estimated useful life, meaning you should be able to guess how long you can generate income with it. It may not have a useful life of one year or less, and may not be purchased and disposed of in the same year.
Any educational expense is potentially tax-deductible. If you are taking courses or buying research material to become more effective in your work, this can be deductible. Think about any books, web courses, local college courses, or other classes or materials that you have purchased to improve your job or business. It’s easy to forget a work-related webinar or business e-book that was purchased online, so remember to save e-receipts.
Limitless Investment and Capital’s Outsourced Tax Preparation Services for Self- Employed
At Limitless Investment and Capital, we can help you understand the tax deductions for self-employed individuals. You can deduct a portion of your self-employment tax in addition to your office expenses, travel expenses, and marketing expenses. It is important to keep careful records of all of your business-related expenses so you can claim as many self-employed business deductions as possible. Your bookkeeping records can also help to determine additional deductions you may qualify to claim.