Expert Tax Tip: Self-Employed Tax Deductions You Should Know

Being self-employed will make you conscious of every penny you make or lose. Being your own boss, getting to do what you love, and having another level of freedom are some of its many perks. But there are also challenges involved. One of them may be around taxes.

In this article, you will discover the tax deductions as a self-employed.

What is Self-Employment Tax?

First, what exactly are taxes involved as a self-employed? If you are self-employed, you need to pay medicare and social security taxes yourself. The self-employment tax rate is 15.3%. 

12.4% is for social security, and 2.9% goes to medicare. This includes freelancers, independent contractors, and small-business owners. 

Paying a self-employment tax is undoubtedly a headache. But, there are ways to keep your taxes down. The following list is proven to be the most used by self-employed individuals. 

1. Home Office Deductions

With the growing number of home-based businesses, the deductions for home offices were simplified. The simplified deduction method allows self-employed individuals who use their homes as an office to conduct a business to alleviate their taxes by using the prescribed $5 per square foot rate. This method applies to offices that are 300 square feet or less.  

Important Note: Your home office doesn’t need to be the sole place you meet your clients to qualify for the home office deductions. But, it’s essential to keep in mind that your home office is the principal or primary place of transactions for your business. The IRS refers to “principal” as using the office exclusively and constantly for all office activities.

2. Vehicle Expenses Deductions

If the nature of your business involves deliveries and trucks, make sure to keep a log of the business miles. You can utilize the vehicle expense deduction when there are vehicular damages. Simply provide the business miles information. If you use your car for both personal and business use, you must properly allocate your expenses. 

You cannot deduct self-employed vehicle expenses, including:

  • Actual vehicle expenses
  • Depreciation
  • Lease payments
  • Maintenance
  • Repairs
  • Gasoline
  • Oil
  • Insurance
  • Vehicle registration fees

If you use actual vehicle expenses, you can’t deduct mileage. Instead, you can deduct:

  • Depreciation
  • Licenses
  • Lease payments
  • Registration fees
  • Gas
  • Oil
  • Insurance
  • Repairs
  • Tires
  • Garage rental

3. Depreciation deductions

Buying equipment like a computer or an air conditioning appliance for your business can fall into the asset or office supplies category – which then qualifies as depreciation deductions that would let you use the expense over your asset’s lifetime use.

The primary rule is deducting your equipment in the same year you buy them if it can last in a year or less. The IRS may determine equipment as assets that depreciate over time if their serviceable lives are longer than one year.

4. Retirement Savings

There are several options available when it comes to self-employment tax deductions that involve retirement savings. 

An IRA is probably the simplest form of retirement savings for self-employed individuals amongst one-participant 401(k) and Keogh plans. You can use it even if you have an employee or not. Most importantly, an IRA has no special filing requirements.

Another popular choice is the solo 401(k). You can deduct contributions to a solo or one-participant 401(k) plan of up to $58,000 in 2021 and $61,000 in 2022 (plus $6,500 if you’re 50 above) or 100% of earned income, whichever is less.

The 401(k) works similarly to a standard, employer-sponsored 401(k). Moreover, the traditional solo 401(k)s contributions are pretax, while distributions after the age of 59 years old and six months are taxed.

5. Incorporate your business

If you have just started your sole trader journey or have been on it for a while, you might want to try exploring other forms of entities that might impact your business positively. Perhaps, you’re now ready to incorporate your business. 

If you decide to switch, you’ll be setting yourself as a limited liability company where you get to be the director. This setup is not only suitable for growing business, but even if you’re still solely operating your business, incorporating your business will give you a chance to reduce your taxes.

With an S Corp, you pay yourself a salary out of earnings. The remaining profit can then be distributed to yourself or any shareholders. You could also simply leave the money back in the business. Most instantly, excess money from your salary falls into income tax and not employment tax.

So, if you operate as a sole proprietorship with $100,000 annual earnings, self-employment tax is due on the entire amount. But, with S Corp, the amount that exceeds the amount of reasonable salary you have will not be subjected to self-employment taxes. 

Final Thoughts

Self-employment taxes hurt if taken for granted. The above tips are some of the several ways to reduce your taxes as a self-employed. Our team has worked with many self-employed individuals, and we know that after how many times you’ve cross-referenced your receipts, there’s always a chance you might have missed something.

Save yourself from unnecessary taxes by seeking help. BASC Expertise offers a free consultation to help you assess your tax needs and solution. Book your free call in our contact form!

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