Tax Benefits for The Self-Employed


The fringe benefits of self-employment are many. You may create a side income on the weekends, work evenings to earn extra income, or you can create a full-time job for yourself and others. You can set your hours and have the freedom of being your own boss.

Almost anyone doing contract work can qualify for small business deductions, even if the work is part time. Sole proprietors and incorporated businesses may qualify, giving many people access to additional tax deductions when it comes time to file. The key to receiving deductions is to treat the work as a business. You must earn income and have a profit motive. To learn more about whether you qualify for self-employment deductions click here.

In addition to gaining more control over your time, there are also a number of tax benefits for those who establish good record keeping practices.

Most tax advantages require action during the tax year, to qualify.

Office Expenses

Supplies purchased for the business typically qualify for tax deductions. Office expenses might include general office supplies such as a stapler, paper, pens, and other office needs. It also expands to other products like printers, computers, lamps, furniture and other costs of creating and maintaining an office space. Think of a work environment and the types of items an employer provides. When you buy these items for the business, use they become deductible.

Phone And Internet Services

Business expenses like a cell phone or use of the internet may be deductible. You receive a full deduction for services exclusively used for business purposes but can deduct a percentage based on the amount of time you use the services for work related activities. All forms of communication qualify including fax services, landline phones, cell phones, VIOP charges, or the internet used for the business.

Health Insurance Premiums

If you do not qualify under another plan, such as your full-time job or a spouse’s policy, you typically may deduct insurance premiums from taxes. Qualifying plans include health insurance, dental or vision plans, and long-term care policies. Premiums required for a spouse and dependents, also qualify as a deduction.

Food

Food deductions come in a couple of forms. First, there is food brought into the office for business meetings. The other is outside food at restaurants, where you might take a client or prospective client to lunch or dinner to discuss business. Lately is food costs during travel.

In order to take deductions for food costs, you must maintain records on the direct cost fo the food, including tips, along with who the meeting was with and the nature of business discussed.

Entertainment

While you may be able to deduct entertainment as a tax deduction, the IRS has many restrictions pertaining to entertainment. For a deduction to qualify as entertainment, you must discuss business during, immediately before, or immediately after the entertainment. The RIS limits entertainment deductions to 50% of the cost. It is very important to keep detailed records of the business activity conducted and how it pertains to the expense of entertainment.

Travel Costs

Travel costs can include within your city or out of town. Travel costs can include meetings with clients, conferences, trade shows, and other business activity. Qualifying deductions for travel must include a specific agenda relating to the business. These tasks can include finding new customers, meeting with potential or existing clients, or learning new skills to improve the business. You may include the cost of transportation, lodging, and meals. Transportation can include rental cars, Uber, plane fare, and so forth. Travel expenses are 100% tax-deductible except for meals and entertainment, which are only deductible up to 50% of costs. Record keeping should include both receipts and a record of activities.

Vehicle Deductions

If you use a car for business, related expenses can be tax deductible, even if you do not use the vehicle exclusively for the business. The IRS has a standard mileage rate, for those who track business mileage, or you can deduct actual vehicle expenses. To qualify you must maintain mileage records or receipts for vehicle operating costs. In 2015 the IRS allowed a mileage rate of 57.5 cents per mile. If you choose vehicle costs, you may include costs such as oil changes, registration fees, repairs, gas, and car insurance. You deduct a percentage based on the amount of business versus personal use.

Home Office Expenses

Having a dedicated workspace within your home allows you to deduct the cost of the office space, as a business expense, regardless of whether you rent or own your home. To calculate the deduction, you need the total square footage of the home and the square footage of the dedicated work space. You are then allowed to deduct a percentage of mortgage interest, depreciation of the home, property taxes, homeowner’s insurance, utilities, and maintenance costs.

Small business owners qualify for a home office deduction if you qualify as a home business (including having earned income), use the space exclusively for work purposes, and it must be the primary business location.

Required Payments

Everyone who earns money must contribute towards Medicare and Social Security. In 2015 the rate for both social security and Medicare was 7.65% for both employers and employees for a total of 15.30% of income. The self-employed must pay both the employer and employee contributions for all income up to $118,500 in wages when social security caps out. There is no cap on Medicare costs. Single filers with income over $200,000 and married filing jointly over $250,000 pay an additional 0.9% in Medicare costs.

Fortunately, the self-employed may deduct the employer portion of the payment as a business expense.

Miscellaneous Deductions

Other deductions might include credit card interest, the cost of industry related publications and subscriptions, continuing education, and retirement plan contributions.

Operating a business, whether for extra income or full-time employment, can be a great way to improve family finances and get additional tax benefits along the way. You must follow the IRS guidelines exactly and maintain good records to prove you qualify for all the deduction you take.