The term self-employed for tax purposes refers to having a business for yourself if you are a sole proprietor, a partner in a partnership, a multi-member limited liability company that has elected to be treated as a partnership or a member of a qualified joint venture. Self-employed taxpayers may usually be liable to pay taxes if net earning is $400 or more. Net earnings is gross income minus ordinary and necessary business expenses. You need to keep track of all business expenses for potential deductions. Internal Revenue Service does not require you to itemize in claiming business expenses and income on your personal return, it must be reported on Schedule C.
If you incurred loss or a small amount of income it is carried over to your form 1040 and added or subtracted to any other earned income. You may also qualify for an optional method to give credit to your social security coverage or increase your earned income credit or the child and dependent care credit.
Allowable Business Tax Deductions
The IRS qualifies a business expense as both ordinary and necessary to the business you’re in, it qualifies as necessary if it is “helpful and appropriate” for the business operation. Below is a list of self-employment tax deductions you may be eligible to take.
Internet Fees
If you use the Internet to do business, your Internet costs may be deductible from your gross income. However, if you or your family have been using the Internet for non-business purposes, only a percentage deduction of time used for business is allowable.
Home Office
IRS has taken the home office deductions easier and no longer a high risk of audit by the IRS. You must be using your office exclusively for business and it is your principal place of business. While the office has to be an identifiable space, it does not have to be a separate room. There are two ways to take the home office deduction. The first method is Simplified Option, you multiply the square space used for your home office by $5. If your home office is a 10 foot by 10-foot space, you'd multiply 100 X $5 to get $500. The second method is Regular Method is more complicated but could result to larger deductions, it allows you to use actual office expenses, depreciation, mortgage interest, rent, real estate taxes and insurance attributable to your business space, etc. all multiplied by the percentage of space your office takes up in your home. For example, if your home is 2000 square feet and your home office is 100 square feet, you multiply your home office expenses by .05 (100 square feet is 5% of 2000 square feet).
Phone Expenses
You can only deduct the cost of your phone that are used directly or related to business. You can deduct the full expense of having a second, business-only line in your home. Similar to the Internet expense, if you also use your cell phone for personal use, you can only deduct the direct businesses expenses and the percentage of time the phone is used for business reasons.
Office Supplies
Office supplies include paper, pens, ink, folders, staples and anything else needed to do business or used exclusively for your business.
Advertising and Promotion
It includes any materials or services used to promote your business such as web hosting, business cards, advertising, fees to marketing agencies or promotional video producers, etc. and it occupies the large portion of your business budgets.
Vehicle Expenses
You have two options when claiming credit for business use of a vehicle, either deduct the actual expenses of operating a car or truck or take the standard mileage rate set annually by the IRS. For actual expenses, report the portion of expenses used for business such as gasoline, oil, repairs, insurance, tires, license plates, and other vehicle expenses. You can also deduct depreciation of your vehicle. For the standard mileage rate, multiply the number of business miles by the rate published on the IRS website. You can also add tolls and parking fees. If you lease a vehicle, use only one method for the entire length of the lease.
Health insurance and Self-Employment Tax
If your sole income is through self-employment, you can deduct the entire amount of premiums you pay for medical, dental and qualified long-term care insurance. If you have another income which is come from wages, you need to fill out Worksheet 6-A of Schedule C to determine the actual deduction. You cannot deduct payments for any month in which you were eligible for an employer-subsidized health plan. While you need to pay self-employment tax on any profit you make to cover Medicare and Social Security, you can deduct half of your self-employment tax from your gross income on Form 1040 to reduce your income tax.
Taxpayers need not forget to include start-up costs in your home business. It covers business license, but your startup may also include legal fees, buying a domain name, setting up your business structure, such as a limited liability company, and compensation for the graphic designer for logo creation. Hiring a consultant or coach may also be deductible if it's related to helping you with your business. Essentially, costs that are directly or indirectly related and necessary to your doing business are tax deductible.
For self-employed, your business will have various running costs. In order to easily track these expenses, the taxpayer should develop a tax organization system for recording them.
