Self-Employment Tax Deductions and Credits
By: Jay Allen Finn, CPA – former IRS Agent
Do you own a business? Check out the following five ways to make tax law work for you.
Home-Office Tax Deductions
Whether you are self-employed or just do a little freelancing, you may be able to save some taxes. The home-office tax deduction is important. You can claim the deduction if you use part of your home or apartment often and only for business. Sole proprietors can deduct home-office expenses from business income. Business owners can even write off rent or depreciation. Many work-at-home taxpayers are afraid that this deduction will trigger an audit. Others may not be aware of the deduction.
There is a simplified method that allows taxpayers to deduct $5 for every square foot of office space. If you have a 300-square-foot office, you can deduct $1,500 of your taxable income. And, this tax deduction is available every year for qualifying home offices. But, you must recapture the depreciation deducted as a capital gain when or if you sell your home.
Health Insurance Premiums
Self-employed taxpayers can deduct medical insurance payments for themselves and for their family. This tax deduction is available whether the taxpayer itemizes their tax deductions or not. Also, the is is not subject to the 10% threshold.
Employment Tax Deductions
Self-employed folks have to pay employment taxes twice. This amounts to 15.3% of profit. But, self-employed individuals do get to write off half of the employees share of the taxes.
Self-employed taxpayers can contribute to a simplified SEP, Simple IRA or a Keogh Plan. These are pretax contributions.
Auto Expense Tax Deductions
Self-employed taxpayers can elect mileage or actual travel expenses. Mileage takes the place of depreciation, gas, repairs, insurance etc. The taxpayer can add tolls, parking, and interest to the mileage calculation. Also, equipment of any kind is subject to depreciation. The tax preparer will determine asset lives the type of equipment but the lives are usually 5 or 7 years.