Whether you are self-employed already or thinking about going down the independent route, an important consideration of this status is how to lower your taxes. Granted, this is an issue which preoccupies a majority of American, but employees do not have the same type of flexibility and strategies they can utilize to reduce their bill from Uncle Sam.
Our taxes assist in greasing the system, but there is no need to oil it more than the bare minimum. As an independent contractor or self-employed person, you have many legal methods to draw down your tax burden. This blog post will aid you in reviewing these strategies and help you select which ones apply to your current situation.
What could be a better than starting to talk about work with a vacation. Unlike employees, self-employed people can combine a vacation with a business trip and greatly decrease their vacation costs. If you have the luxury of combining a side-vacation trip with a business trip, please go ahead and book it because this option alone makes self-employed individuals the envy of every employed person.
All travel costs associated with the business side of the trip, including airfare, bus and train tickets, hotel rental and food expenses can be transferred from your personnel expenses to your business expenses and reduce your taxable self-employment income. Just ensure you only deduct a propionate expense which is reasonably allocated to the time you spent on the trip dealing with your self-employment activities. Even though we wish we could tell you the opposite, remember if you want to take your family with you on this vacation, the additional costs cannot be included in your self-employment expenses.
Another one of the great tax deductions which makes employed staff jealous of their self-employed counterparts is the home office deduction. You may claim a percentage of your home bills as part of your business expenses if you run your business from the comfortable confines of your dwelling. You can claim the portion of expenses a room represents from the total space available in the house if you have a spare room set up exclusively for your entrepreneurial spirit.
For instance, if your room is 150 square feet out of a total space of 1200 square feet available in the house, you can transfer 12.5% (150 divided by 1200) of your home expenses, such as utility bills, rent and internet costs, against your self-employment income.
Every time you use your personal car for your self-employment business activities, you drive up your business expenses and decrease your taxable income. However, always ensure to keep proper records so the deduction you claim cannot be denied by the Internal Revenue Service (IRS). No matter how tempting it may be, never try to pass personal auto expenses as business costs.
You have an option to deduct expenses based on actual costs incurred or by using standard mileage rates predetermined yearly by the IRS. The use of a standard rate will simplify your life since record-keeping requirements and calculations are kept at a minimum. All you have to do is note and add up your daily business miles and multiply the total by IRS’s standard rate ($0.575 per mile in 2015). The result is your deductible mileage expense for the year.
On the other hand, if you want to calculate your deduction based on the actual costs you incurred, you need to add up your yearly car expenses, including repairs and maintenance, gas, registration fees and insurance, and multiply the sum by the percentage of time you used the car for self-employment activities.
The percentage is calculated by dividing the number of miles you drove in the year for work by the total number of miles you drove the car. For instance, if your daily business miles for the year add up to 1,000 miles and you drove a total of 10,000 miles during the year, 10% of the sum of your expenses will be eligible towards reducing your taxable self-employment income.
You are entitled to deduct a host of expense categories if you operate your own business. These expenses have to be incurred due to your business activities to be eligible to apply against your self-employment income. Some of the expenses you can claim include advertising and publicity, website hosting and domain registration fees, memberships, professional publications, dues, office supplies, telephone costs, shipping charges, and so on.
A person who is self-employed and who is liable to pay 100% of their Social Security and Medicare taxes (at a rate of 15.3%) can deduct 50% to approximately 57% of the taxes paid. The logic behind this rule is if you were employed, your employer would pay 50% of the tax and claim it as a business expense so you should be entitled to the same benefit. This is a straightforward claim as you do not even need to itemize to claim the tax deduction.
This is an important deduction as the amount can be quite significant and many individuals are not aware of the existence of this rule. Self-employed persons who are ineligible to participate in any group health insurance plan (like the one with your spouse’s employer) can deduct all long-term care, dental and health insurance premiums they pay, including the amounts paid to cover all family members (a spouse and children under 27 years old, even if they are no longer dependents). Expenses are deductible against income even if the health insurance policy is under a personal name rather than the business name.
Besides the numerous advantages of being your own boss, such as setting your own work schedule, picking your clients and the people you want to work with, and a greater chance of making it big, there are fiscal benefits as well like reducing your personal income tax burden. Take full advantage of the above strategies to maximize your take home pay.
BHATIA & CO, INC, CPAs