Self-employment allows you to stand up for what you believe in while at the same time providing you with independence and freedom over your daily routine. However, like most independent contractors and freelancers out there, one question that is likely on top of your mind during tax time–is how you can reduce your self-employment taxes.
Self employed write-offs help you decrease a certain amount from your taxable income and save tax. Tax deductions help encourage a wide range of activities, such as charitable contributions and homeownership. They also ease the burden of taxes you are supposed to pay to the state and local governments, allowing you to deduct the overall cost of legitimate business expenses.
Self Employed Write-Offs
Most self-employed people are always on the lookout for every deduction they can use to reduce their taxes. However, many of them are not necessarily aware of all the tax deductions they are legally entitled to. So, we will take a closer look at the most common types of self employed write-offs you can apply for.
Deductible Taxes
If you own a small business or are an independent contractor, you can write-off certain types of taxes. The most common ones include real estate taxes, which the local or state government assesses, sales taxes, and certain local and state income taxes.
As a general rule, you need to understand that you will need to make the deductions during the actual year you paid them. For instance, if you plan to claim local and state taxes on your 2021 tax returns, you will need to ensure that these taxes are paid before the end of the same year. To avoid any mishaps in your calculations, you may need a tax professional to help you with your taxes.
Home Office Deductions
Suppose you are self-employed and conduct your business operations from your home or use your garage for your business. In that case, such self employed write-offs can be very beneficial to your operations. However, once you gain employment from another company, you will no longer be in a position to apply for home office deductions.
The simplified and regular methods are the two available options to claim your home office deductions. Nevertheless, to qualify for the deductions, your office must meet the following requirements;
• The IRS requires that you use your home office regularly and exclusively for business purposes.
• Secondly, the office must be your primary place of business; this means that you have to use the office for business meetings, closing deals, and completing transactions.
How to Determine Your Deduction
The simplified option helps you to determine your tax deduction by simply multiplying your home office’s total square footage by $5. However, this only applies up to 300 square feet. An exception might occur if your home is in a high-cost area where the rent and mortgage payments are considerably higher, resulting in a higher deduction.
For the regular option, your write-off is based on the total percentage of your home that your office occupies. To get the tax deduction, you divide your office’s square footage by your home’s total square footage and multiply the percentage by the sum of your home’s total allowable expenses. For example, if your home office is 150 square feet and your home is 1,500 square feet, you will deduct 10% of your allowable expenses.
Business Mileage
Business Mileage deductions only apply if you use your car for work-related purposes, such as making deliveries and driving to business meetings. This allows you to deduct the mileage from your tax payments.
If you use your vehicle for professional and personal trips, you can only deduct the business mileage from your taxes. Like home office deductions, you are offered two options to claim your business mileage on your taxes. One is the standard mileage rate and two is the actual expense method.
Standard Mileage Rate
For the standard mileage rate, you must meet several conditions for eligibility. These include;
• The vehicle must be registered or leased under your name.
• You can only operate a maximum of five cars
• Ensure that you have not claimed depreciation on the vehicle (s)
The standard mileage rate includes insurance, gas, licenses, registration fees, tires, oil, repairs, and depreciation. A specific rate is offered every year, which you can multiply with the overall business miles you drove throughout the year. In 2021, the standard mileage rate offered is .56 cents per mile. For example, if you drove a total of $5,000 business miles, you could deduct $2,800.
Actual Expanse Method
On the other hand, the actual expanse method (TAEM) allows you to deduct the actual business cost incurred to operate the vehicle. This means that if you use the vehicle for your personal and business needs, you will need to keep track of the actual business miles.
As a general rule, you should keep clear records of your business mileage no matter which method you opt to use. You can accomplish this by keeping a record of the dates, nature of the trips, and odometer reading. It is also very wise to record all your business mileage expenses.
To gain the most out of your business mileage self employed write-offs, it is recommendable to calculate the deductions under both methods to pick out the method that generates the largest deductions.
Health Insurance
In some cases, if you buy medical insurance policies for yourself or your family, you might be eligible for self employed write-offs on the premiums.
Dental and Medical insurance premiums for yourself, your spouse or your family (children under the age of 27) can be deducted at the end of the tax year. Long-term care insurance premiums are also eligible, although some specific rules apply.
Health Insurance write-offs are an adjustment to your income rather than a direct itemized deduction. This means that you do not necessarily have to itemize it to claim it.
You should make a point of finding out whether you are eligible for deducting your premiums as a medical expense on self employed write-offs. In most cases, this will only work if you pay for your premiums directly out of your pocket, and the deduction is usually limited to expenses that surpass 7.5% of your adjusted gross income.
Training and Education Expenses
You can also qualify for self employed write-offs if you paid for work-related education expenses during the tax year. However, your payments should be directed towards education purposes that improve or maintain skills related to your current line of work (Education that is not related to your current line of work may not be considered deductible)
Retirement Savings
When it comes to retirement-related self employed write-offs, you might have more than just one option. The most popular option is the solo 401(k), where contributions can be taxed as ordinary income.
Deductions will change from year to year so having a good accountant will help you to get the most benefits.
Credit Card or Loan Interest
You should make a point of checking your credit card statements for any potential self employed write-offs. You can deduct the interest accrued in purchases made exclusively for your business purposes.
Although you don’t necessarily have to use a business credit card to write off the interest charges, you cannot deduct credit card interest accrued from your business expenses if the purchases were made using another person’s credit card. However, if you use your credit card for business expenses, you are still eligible for deductions on interest charges.
How Much Can I Deduct Self-employed?
Most people opt for the standard deduction, which lets you deduct a specified fixed amount from your taxable income. Standard deductions are the simplest way to reduce the overall tax due. For 2022, the standard deduction amounts were as follows;
• $12,900 for individual or married couples filing tax returns separately
• $19,400 for individuals filing tax returns as the head of the household
• $25,950 for married couples or surviving couples filing tax returns jointly
Other people find that itemizing their deductions results in more significant savings for them and their business.
What You Can Claim
You can claim up to an outstanding 50% of the entire amount you pay in self-employment tax as income tax deductions. However, filling out the paperwork is considerably more demanding. In any case, you should ensure that you have all the necessary documentation to back up your claims just in case you’re audited. Below are some self employed write-offs methods that can come in handy.
How Do I Get the Most Taxes Back If I Am Self-employed?
Here are some tips you can employ to get the most out of your self employed write-offs in 2023.
• Avoid the standard deduction if you can itemize (it might be a great idea to get help from a tax professional)
• You can claim the relative or friend you have been supporting.
• Make contributions to your retirement plan to get multiple benefits.
• Remember to account for your refundable tax credits.
• Get above-the-line deductions if you’re eligible
Self employed write-offs have helped reduce the total amount most people pay when properly used.
