With the recent uptick in self-employed workers, you may be looking to freelance or register your own business. In either case, you may want to start thinking on how to lower your self-employment taxes.
Here are some tax breaks that may benefit you, including the new business income deduction.
Self-employed workers have become a prominent demographic amidst the COVID-19 pandemic. If you are freelancer or a registered business owner you still have to pay taxes. However, thanks to the many tax breaks available to small businesses, self-employed individuals may be able to keep a significant portion of their income.
Here are some tax breaks you should keep in mind: 1. Health Insurance
This deduction is conditional, based on whether you as a self-employed individual is qualified to join your spouse's medical plan. If you don’t qualify, you can deduct medical and dental premiums for spouses, dependents and children below the age of 27. This deduction is an income adjustment, not an itemized deduction, so it's not necessary to itemize it to claim it.
As self-employed you may deduct mileage costs for business-related travel using your own car. However, you will need a mileage log to prove your travel. Alternatively, you can opt to deduct car-related expenses such as gas, oil, depreciation, licenses and so on. If you have five or more cars registered to your business, you will have to choose the latter.
If you pays to earn skills that can be use at work, the cost of that education is deductible. This deduction covers tuition, lab fees, supplies, books and transportation to campus.
4. Home Offices
Most self-employed individuals have a dedicated workspace at home. If so, you can claim for the percentage of your floorplan the home office takes up. The deduction may apply to a portion of the mortgage paid on the entire house. Alternatively, your can opt for a simplified deduction, which allows you to deduct five dollars per square foot, up to $300. That amount would cover a 17x17 workspace, which is larger than many home offices.
5. Self-Employment Taxes
One of the most common self-employment deductions is using self-employment tax. The deduction applies to income tax, and you are allowed to deduct up to half of your self-employment tax from your income taxes.
6. Retirement Savings
Retirement options for self-employed people may also yield deductions. If you are signed up for a solo 401K, you can leverage deductions up to $58,000 (in 2021) on the contributions to that fund. If you are over 50, you can get an additional $6,500.
7. Office Supplies
While they don't seem that costly, expenses from office supplies do add up. Home offices typically require a lot of supplies, from pens and paper clips to paper and ink for printers. Even if you didn't use the supplies, they can still be included on the deduction once receipts prove their purchase. For items that have a shelf-life of longer than a year, you can deduct the cost of the item in the year when you bought it.
8. Business Insurance
Insurance premiums can be deducted for self-employed individuals. Business insurance, accident insurance and employee health insurance are all covered under this single deduction.
9. Phone and Internet Costs
If your business relies on the internet, these utilities can also be deducted from tax payments. If the connection is registered to the company, you can deduct the entire amount of the bill.
10. Loan & Credit Card Interest Payments
If the business has loans registered to itself, the loan payments can be deducted from the company's taxes. Many people believe that this is limited to a business credit card, but that's not strictly true. If the company uses a personal credit card to purchase something for business use, the payments can be deducted just the same.
11. Start-Up Costs
Up to $5,000 in start-up costs and $5,000 in organization costs can be deducted under this schedule. These costs include registration fees and other monetary details that the business must pay to get started as a company.
12. Business Travel and Meals
In the event that you have to travel, the business can deduct the travel expenses, including the cost of meals. However, if you are considering using the travel expenses to cover the cost of a vacation, the deductions don't cover travel for a spouse or children.
13. Membership Fees
Some professionals, such as engineers and lawyers, are required to join professional organizations that charge fees. If you must pay membership fees as part of your self-employed business, you can claim deductions for those fees.
Advertising that helps promote your business can contribute to deductions, but keep in mind that advertising toward lobbying cannot. Conventions and political parties are also not acceptable for advertising deductions.
15. Qualified Business Income Deduction
This deduction, which is fairly new, allows business owners who made less than $163,300 in the previous calendar year to claim up to a 20-percent deduction on their taxable business income. This amount isn't just for business income, but from all sources. Even if your income is above the limit, you may be able to claim some amount of deductions on their taxable income.
Don't Overlook Deductions As any self-employed person who has started a business over the last year knows, each dollar counts.