File Taxes as Self Employed
File Taxes As Self Employed – 15 Big Deductions
It might surprise you to know that your car, truck, home, insurance, your education bills, and even retirement savings can be used to get you a big tax break if you file taxes as self employed.
Those of you who are freelancers, contractors, or maybe just own your own business, have some unique and valuable tax deductions that you can take to offset business income. Our list here is by no means all inclusive, but we’ll show you 15 that you should consider.
1. Deduction for a home office
Many self employed individuals work from an office in their home, and are eligible to use this tax break as a deduction when filing taxes if self employed. The expense includes a portion of your rent or mortgage interest, real estate taxes, homeowner’s insurance, utilities, and repairs and maintenance.
Before the Tax Cuts and Jobs Act became effective, certain employees who were required by their employer to do some work at home were eligible, but no more. Now, only those who file self employed tax return can take it.
This is how it works: First of all, the office space must be used only for your business with no personal use. The IRS says that it must be exclusive and regular use for your business. You need to measure the space & see how many square feet it is. Then you need to get the total square feet in your home, and divide the office space by this number
A simple example would be an office space that is 15′ by 15′ or 225 square feet. Say your home total square footage is 2,250, so the business portion is 10%. This means that you can deduct 10% of the housing expenses mentioned above.
Those are called indirect expenses. However, any expenses that you incur just for the office space can be 100% deductible. Carpeting, painting, furniture and equipment would be a direct expense and fully deductible.
You have another option available that doesn’t require too much detail. It’s called the simplified method and the IRS allows you to use a space up to 300 square feet and just multiply that by $5. You should calculate the home office deduction both ways and use the higher option before you file taxes as self employed.
2. Deduction for medical insurance
You might be able to take a deduction for the cost of your premiums for medical and dental insurance that you bought to cover yourself and your family. In certain situations, long term care insurance premiums can be used too. The IRS Publication 535 has a lot of good information on this.
How this deduction can be used: First of all, it is not used as a deduction on your Schedule C, business schedule. Instead, it’s used as an adjustment to your gross income which reduces your overall taxable income.
Two big warnings though…If your spouse has medical insurance coverage at his/her employer’s firm, and you’re eligible to join that plan, and you choose not to, for whatever reason, this deduction is not available to you. Plus, if your self employed business has a net loss for the year, you can’t take this deduction.
If you can’t take this deduction as a self employed person, you can then probably use it on Schedule A, itemized deductions, if you itemize your deductions instead of using the standard deduction. You should be aware though, the premiums must have been paid with after tax money, and are subject to the 7.5% AGI limitation.
3. Deduction for continuing education
Working as a self employed person may require that you take various courses to maintain or improve your skills. If you qualify, you can deduct the cost of tuition, books, supplies, laboratory fees, and even travel to and from classes.
How this deduction works: This deduction is limited to maintaining or improving your skills if needed in your line of work. If you’re simply taking courses to make a career change, it won’t work. IRS Publication 970 covers this topic very well.
4. Deduction for use of your car and/or truck
Working as a self employed person may require that you travel to meet customers or picking up and delivering various items. If so, you have two options you can use as a deduction.
How this is calculated: First of all, keep an accurate and complete mileage log book recording each use of the vehicle. For the tax year 2021 the mileage rate to use is .56 per mile. At the end of the year, you simply multiply the total miles used for business by the IRS mileage allowance.
The second option is to use the actual expense method.
You’ll need to save all of your receipts for the year for gas & oil, licenses, insurance, repairs, tires, etc. In addition, the vehicle can be depreciated. If you lease a vehicle, IRS Publication 463 has rules about how much of the lease payment you can deduct. In any event, use the method that gives you the best deduction.
5. Deduction for retirement savings
When you file taxes if self employed, there are a number of options available to you in the area of retirement savings. One of the most popular is the solo 401(k). You can deduct up to $58,000 in 2021, plus an additional $6,500 if you’re over the age of 50.
How the solo 401(k) works: In actuality, it’s very similar to the standard 401(k) that would be sponsored by an employer. However, with the solo 401(k), you cannot have any other employees. You are eligible to make contributions as the sole employee and as the employer too. In most cases, contributions are pre-tax and after you’re 59 1/2, distributions are taxed as ordinary income.
You also have the option to make the contributions after tax by using a Roth 401(k). There is no deduction now, but your distributions are tax free. If you expect to have high income in retirement, a Roth option might make better sense to you.
6. File taxes as self employed to deduct self employment tax
As a self employed person, you can deduct 50% of the self employment tax on Schedule 1, Adjustments to income. It is not deducted on your Schedule C, business schedule. It reduces your taxable income and income taxes.
7. Deduction for business insurance
In today’s world, business insurance is a necessity. From liability and fire to cyber protection, operating without it could be a disaster in many ways. You can deduct the premiums you pay for the ones listed above, as well as employee health insurance.
When filing taxes if self employed, Schedule C has a dedicated line for listing those premiums. As a checklist, to make sure you don’t deduct the wrong thing, get a copy of IRS Publication 535.
8. Deduction for office supplies
Just about anything that you use in your business operations office can be deducted. As long as it’s ordinary and customary for your type of business, the IRS will let it fly. I won’t list everything that qualifies as it’s quite lengthy. If you’re on a cash basis of accounting, you can deduct it when you buy it. Even if you charge it on a credit card on the last day of the year and don’t pay it until the following month, you’re good.
For larger items like computers, desks and furniture, and other office equipment, you need to treat them differently. Their useful life is usually longer than one year, and are normally classified as assets. Instead of deducting the full amount all at once, you’re required to depreciate them over 5 to 7 years, depending on the type.
However, there is a Section 179 option in the tax code, whereby you can elect this option to expense it all in the first year. For the year 2021, the annual limit is $1,050,000 of qualifying equipment. These annual limits were increased substantially to promote business buying.
9. Deduction for loan and credit card interest
Normally this type of unsecured interest is considered consumer interest and is not deductible for an individual on Schedule A. However, if you file self employed tax return, this can be deducted on Schedule C for your business.
Be advised that the interest must be for business expenses. They can be deducted on a credit card in your individual name as long as the card is used for just your business purchases.
10. Deduction for telephone and internet costs
When you file taxes as self employed, you can deduct telephone and internet costs as long as they’re used in your business. If you have a dedicated line for the business, you can deduct the entire cost. Today, however, in order to save money, many individuals use a cell phone for business and personal calls.
If you don’t have a dedicated line or connection, you’re required to figure out what the business use percentage is, and deduct that amount only. In addition, be prepared to substantiate the percentage used for business in case of an audit. Don’t just guess and use that amount either.
11. Deduction for business travel and meals
When you file taxes if self employed, these can be legitimate expenses and deducted at 50% on your Schedule C. These include hotels, air fare, taxis and food as long as they are actual business expenses as defined in the tax code. Be advised that if your spouse or other family members accompany you, their expenses are not deductible unless they are employees of your business.
Prior to 2021, you were able to deduct meal costs that weren’t lavish or extravagant, and weren’t for entertainment. The cost of the meal had to be separately listed as such. In 2021, the percentage was increased to 100% as long as the meal was in a bona fide restaurant.
You have an option to use a standard daily meal allowance established by the US General Services Administration if you so desire. If I were to use that method, I’d still keep my receipts for all meals just in case of an audit.
12. Deduction for start up costs
If you’re filing taxes as self employed, this is a possible deduction for your expenses that were incurred to set up your business. If you’re not familiar with the term, start-up costs are expenses incurred before it opens. Some examples may be employee training, early advertising, travel, and consulting fees.
The IRS will allow you to expense up to $5,000 as long as your total expenses are below $50,000, and the balance must be amortized over a 15 year period. The same applies to Organizational costs…$5,000 expense, etc.
Start up costs and organizational costs are considered assets and any excess over the $5,000 expense allowance must be amortized. The annual amortization amount is claimed on the depreciation line on your Schedule C. The rules for this section can be confusing and are complex, so you might want to get a copy of IRS Publication 535 for more information.
13. Deduction for advertising expenses
For any new business, it’s very important to advertise in some way. If people don’t know you exist, how can they buy your services? You can deduct advertising in practically every venue, as long as it is to promote your business in some way.
You need to be aware, though, you cannot deduct anything that is political in nature, or if the proceeds benefit any political party or candidate. Right near the top in the expense section of Schedule C, you’ll find the line used for advertising expenses.
14. Deduction for memberships
When filing taxes as self employed, there are certain types of memberships that are not deductible. Examples of those are country clubs, travel related clubs, and any other that can be construed as entertainment. Most other professional organizations, chambers of commerce, and civic and public service organizations are okay.
15. Deduction for the qualified business income (QBI)
When the Tax Cuts and Jobs Act was enacted in 2017, Section 199A of the act provided an important deduction for self employed individuals and others who received pass through income. It basically provided a deduction on the front of the Form 1040, for 20% of your net self employment income and also 20% for pass through activities net income.
There are income limits and phase-outs that are based on filing status’. The law can be quite complicated a well. Certain businesses, classified as a specified service trade or business, created additional income thresholds to consider. here’s a link to read more about this deduction.
If you file taxes as self employed, this can be a significant deduction that will be available to you. We, at EZ Tax, offer you flat rate pricing of $25 to file any type of personal return, from the simple to very complex, and the $25 fee includes your federal and state returns plus you can file taxes electronically at no extra cost.