Being self-employed brings with it a lot of independence. You get to make your own choices and set your own hours. You work when you want to work!
But for better or for worse, that independence also means a lot more responsibility. You’re operating your own small business, and as a result, you’re responsible for your own income taxes in a way most employees aren’t.
If you’ve never paid or filed taxes as a small business owner before, there’s a lot you should know before you get started. There are numerous ways you can bring down your overall taxable income and increase the money you get to take home. If you’re not fully informed on all these possible deductions, you could end up paying way more than you’re required.
Eliminated or Changed Deductions from the Tax Cuts and Jobs Act
Small business taxes can be extra complicated at times because of how frequently the laws change. The tax code can change significantly from one year to the next, meaning you have to relearn everything all over again.
The 2017 Tax Cuts and Jobs Act changed a lot about small businesses; many deductions and credits were adjusted or removed entirely.
Here are a few of the tax deductions that changed or went away because of the TCJA.
- Personal and dependent exemptions are suspended.
- The standard deduction was increased significantly.
- The child tax credit was increased.
- Deductions for commuting expenses are more limited.
- Job relocation moving expenses are no longer deductible, except for active-duty military personnel.
- Alimony expenses are no longer deductible and receiving alimony payments no longer counts as taxable income.
What Is the Qualified Business Income Deduction?
Another significant result of the TCJA is the qualified business income deduction, and this affects all small businesses where the owner is taxed for business income directly as an individual. Every year, small businesses below a certain level of income can deduct 20% of their qualified business income. QBI refers to your net income but excludes income related to capital gains, interest, or income earned outside the United States.
7 Self-Employment Tax Write-Offs to Use
Here are seven valuable tax write-offs you should be sure to include on your small business tax deductions checklist.
1. Self-Employment Tax Deduction
As a self-employed individual, you have to pay a higher percentage of your income into Social Security and Medicare, for a total of 15.3%. However, you can claim a deduction for half of that. 7.65% of your self-employment tax can be claimed as a business expense and not counted for your taxable income.
2. Home Office Deduction
Another big possible source of savings is the home office deduction. However, simply working from home isn’t enough to be able to claim this deduction. You must have a dedicated space in your home that is only used for your business, and it has to be a primary site for your work.
If you’re eligible for this deduction, you can claim a portion of all your home-related costs as business expenses. You can deduct a portion of your rent or mortgage and other important home repair costs in proportion to the space of your home office. All of that is in addition to the costs of any office supplies or goods you use exclusively for work.
3. Health Insurance Premium Deduction
If you’re not eligible for health insurance through an employer or a spouse, then you can count your health insurance premiums as a business expense as well. Effectively you are your own employer paying for your employee’s health insurance, so that cost should be paid with pre-tax income.
4. Vehicle Use Deduction
Do you drive a lot explicitly for your business? Commuting costs don’t count here, but other work-related travel costs can be deducted, either for a company car or your own personal vehicle.
For this deduction, you can either keep a paper trail of all your vehicle expenses, or you can simply track mileage. The IRS will provide a deduction following the standard mileage rate. For 2021 taxes most businesses can deduct 56 cents per mile traveled for business purposes.
5. Internet and Phone Bills Deduction
How much do you spend on internet and phone bills? These may also be deductible expenses as far as they’re used for your business. For a home office or a personal phone that you also use for business costs, you can deduct a fraction of the total cost based on an estimate of your relative business use.
On the other hand, you might have a separate phone used only for work, or even a separate internet subscription. In that case, you can deduct the full cost of those bills as necessary expenses for your business.
6. Meals Deduction
Under certain specific circumstances, you can deduct all or part of costs related to meals or entertainment purchased as part of your work. If you take clients out for meals or bring food to your workplace to share with others, then those costs are 50% deductible.
There are also a few meal-related costs that can be fully deducted. To be 100% deductible, it must be food or entertainment provided as part of a party for the entire company at once, or it must be something officially included as compensation for your employees for whatever purpose.
7. Retirement Plan Contributions
Every year you’re permitted to deduct a significant amount of money for payments you make directly into your retirement plan. This allows you to defer paying taxes on that income until you withdraw that money at a later date.
It would be a smart idea to max out your deductible retirement contributions before the end of each year, especially if you’re likely to find yourself in a higher income tax bracket.
Find an Accountant That Can Help You Save Money
As you can see, there’s a lot that goes into managing your income tax return as a self-employed person. The taxes themselves can be quite a lot. It takes some work to keep track of all the tools you have at your disposal to reduce your taxable income and keep your final tax bill at a reasonable level.
If it all seems overwhelming, or you’d rather not have to relearn the rules every time new legislation changes the tax code, then you can hire a tax consultant to help your small business save money. Working with a professional will help the whole process go more smoothly. You’ll be able to rest easy knowing you’re not leaving potential savings behind.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.